UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





Form
10-K




[X]
ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE


SECURITIES
EXCHANGE ACT OF 1934


For
Fiscal Year Ended


December
31, 2008




Commission
File #033-31067





ECO2 PLASTICS,
INC.


(Exact
name of registrant as specified in its charter)





Delaware


(State or
other jurisdiction of incorporation or organization)





31-1705310


(IRS
Employer Identification Number)





680
Second Street, Suite 200


San
Francisco, CA 94107


(Address
of principal executive offices)(Zip Code)





(415)
829-6000


(Registrant's
telephone no., including area code)





Securities
registered pursuant to Section 12(b) of the Act: None


Securities
registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 Par
Value.




Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No o




Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-K not contained in this form, and no disclosure will be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes x





Revenues
for year ended December 31, 2008 were $6,690,312.





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definition of “accelerated filer and large accelerated filer” and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check
one):  Smaller Reporting Company x





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  Yes oNo x





The
aggregate market value of the voting common stock held by non-affiliates of
the Company as of December 31, 2008 was approximately $9,053,099 based upon
558,833,286 shares held by such persons and the closing price of $0.0162 per
share on that date.  Shares of common stock held by each officer and
director and by each person who owns 10% or more of the outstanding common stock
have been excluded because these people may be deemed to be affiliates. 
The determination of affiliate status is not necessarily a conclusive
determination for any other purpose.





The
registrant does not have any non-voting common stock outstanding.





Number of
shares of the registrant's common stock outstanding as of March 31, 2009 was
561,681,045.





Number of
shares of the registrant’s preferred stock outstanding as of March 31, 2009 were
155,691,168 shares of Series A Preferred and 328,630,238 shares of Series B-1
Preferred.








Item
1.                                Business





Business
Description





Founded
in 1999 and based in San Francisco, California, ECO2 Plastics,
Inc., a Delaware corporation (“ECO2” or the
“Company”), is a publicly-traded company (OTCBB:  EOPI), that has
developed a unique and revolutionary process, referred to as the ECO2
Environmental System (the “ECO2
Environmental System”). The ECO2Environmental System cleans post-consumer plastics, without the use of
water, with substantial cost savings versus traditional methods within a
proprietary, closed-loop system (the “Process”). This Process is both patented
and patent pending, and is licensed from Honeywell FM&T (“Honeywell”) and
the Department of Energy (“DOE”) on an exclusive basis for the life of the
patent. Since inception, ECO2 has
invested in the development of the technology and equipment comprising the Eco
2
Environmental System, which includes the filing of a new “Process Patent” with
Honeywell in May 2005 with the patent being granted in 2007. This also included
building several scaled up versions of the Prototype ECO2
Environmental System (the “Prototype”), testing of the Prototypes, building a
pilot plant, evaluating the product produced by the Prototype and real-time
testing. The Company’s first full scale production facility was constructed in
Riverbank, California and is now  producing saleable product and
ramping up to full scale operations.  ECO2’s goal is
to build and operate plastic recycling plants (the “ECO2Plants”)
in the USA that utilize the ECO2
Environmental System and to expand the ECO2
Environmental System worldwide. ECO2’s growth
strategy includes organic growth, strategic acquisitions and licensing or
partnership agreements, where appropriate.





In 2004,
the State of California Integrated Waste Management Board (“CIWMB”), through the
Recycling Market Development Zone Loan (“RMDZ”) Program, approved a $2 million
“matching funds loan” to assist ECO2in
building a plant in California. The matching funds loan was used to complete the
initial plant in Riverbank, California (the “Riverbank” or
“Plant”).





The Plant
is strategically located between the San Francisco bay area and the greater
Sacramento metropolitan area. The Company believes that this location will allow
ECO2to provide convenient access for the generators of the feedstock (bales
of plastic bottles) from approximately 10million residential
customers.





ECO2may locate
a second plant in California to capture additional volumes generated in the
largest recycling market in the United States.   The
Company  engaged a team of engineers to conduct the preliminary design
efforts. In addition, a case can be made for a third ECO2facility
in San Diego County, which has  a significant population, continued
growth, and an ample supply of feedstock from Mexico.




In 2008
the Company purchased its feedstock for an average of $0.28 per pound and sold
the finished clean flake for an average of $0.52 per pound. Each plant has a
potential revenue stream of approximately $20+ million per year.





The
Riverbank Plant is mechanically complete and the Plant is ramping up, but has
not yet achieved full-scale operations.  New equipment is being
installed and is expected to improve yield, reduce cost, and provide production
alternatives. Based on the current production runs, the company believes that
the Plant will produce approximately 40 million pounds of clean, clear flake at
optimal throughput.




ECO2has access to a supply of raw material from the major collectors of
the post consumer used beverage containers in California, as well as from
several independent sources. Primary suppliers of material include buyback
operations, curbside collection programs, materials reclamation facilities,
waste haulers and a network of plastic brokers. With the cost advantages that
are expected from  its production process, ECO2expects to
be able to compete aggressively for the available supply of plastic.
Approximately 900 million pounds annually of material is shipped from the
western United States through ports in California to Asian buyers each
year.





ECO2believes
it can utilize extensive contacts within the USA plastic container collection
and processing industries to its benefit. Through these contacts, ECO2and its
strategic alliance partners conservatively have access to over 60% of the
domestically available Polyethylene Terephthalate (“PET”) and High Density
Polyethylene (“HDPE”) from post-consumer container streams. On a regional basis,
ECO2believes it can secure feedstock agreements with its extensive industry
contacts to meet the growth needs of each newly developed plant.





In
November 2008, ECO2received a
favorable opinion letter from the US Food and Drug Administration (FDA) allowing
PET processed with the ECO2process to
be used in direct food contact applications.  The opinion letter
concluded that ECO2's secondary recycling process, as described in the Company's
submissions, would produce RPET that is of a purity suitable for use up to 100%
recycled content in the manufacture of articles in contact with all food types,
under Conditions of Use A (i.e. ready-prepared foods to be reheated in container
at time of use) through H (i.e. frozen and refrigerated storage; ready-prepared
foods intended to be reheated in container at time of use) and J (i.e. cooking
at temperatures exceeding 121 degrees Celsius such as baking and
browning),  The opinion letter provided the highest level of approval
in these nine categories.





In 2007,
a representative approached ECO2 from the
Vehicle Recycling Program of USCAR, the umbrella organization for collaborative
research among Chrysler, Ford and General Motors. ECO2 was asked
to develop a solution for the removal of PCB residue on plastic generated as a
by-product of auto shredder operations (“Auto Shredder Fluff”). Approximately
2.5% of a car’s weight is comprised of various forms of plastic. This plastic
ends up in the Auto Shredder Fluff with the resultant plastic often contaminated
with harmful PCB’s, which is a significant problem for auto manufacturers, both
economically and from a public relations and liability
standpoint.  ECO2has tested
contaminated samples submitted by the representative and has successfully
cleaned the plastic to acceptable environmentally safe
levels.  ECO2is
confident that these additional tests will result in further proof that its
technology for the removal of PCB residue is state of the art. VRP granted the
Company approximately $84,000 to further study the possibility of using the
ECO2
Environmental System to mitigate PCB contamination in Auto Shredder
Fluff.  Should the results of the study prove to be positive, the VRP
would then engage the Company to build a plant to produce 4,000 pounds of flake
per hour. The first payment of $20,000 was received in January 2008 and ECO2 has
received payments for completing three of six total phases of the contract. The
remaining phases will be completed by the end of the first quarter 2009. Once
successful, the VRP has suggested the possibility to build additional ECO2plants to
clean and consume the plastic domestically.




Further,
ECO2believes that the international market for ECO2’s products
and services is substantial and has received multiple inquiries regarding the
potential for construction of ECO2plants
around the world. In most cases internationally, plant feedstock should be
available for lower cost (versus $0.28 per pound in the USA), which should
increase ECO2’s
operating profit margins.





In 2006,
the Company was developing its recycling processes, plant operations and
technology development, which approximated $2.0 million, and was considered
research and development expense as the Company had not commenced operations,
other than at a testing level.  In 2007 and 2008, the Company spent
approximately $121,000 and $36,000 on research and development. Production
costs for 2007 and 2008 were significant and reflected continued work with the
new equipment and technology.





As of
December 31, 2008, ECO2 had
approximately 35 full time employees and 1 part-time employee.




Currently,
70% of the materials collected west of the Mississippi are exported to China in
the form of bales of crushed plastic bottles and containers. Despite growing
demand in California for ECO2type of
services, there is currently no significant competition in the PET or HDPE
segments of the market west of the Mississippi. Nearly all of the competitive
processing capacity exists east of the Mississippi and each facility deploys
higher cost, less effective water-wash recycling systems. ECO2is the
only company that washes PET without water using the ECO2
Environmental System, and as an end result, offers substantial operating
efficiency advantages, and significant positive environmental
benefits.




Item
1A.                      Risk
Factors




Risks Related to Our Business




Our
production process has not yet, and may not achieve expected production
volumes.





ECO2’s
proprietary patented and patent-pending process has yet to achieve expected
production volumes, and there are no assurances that these volumes will be
attained.  The Company is working to overcome the technical obstacles
posed by our unique technology and to evaluate other
technologies.  Actual results may differ materially from those
predicted and changes in the circumstances on which we base our predictions
could materially affect our actual results.





We
have had losses since our inception. We expect losses to continue in the near
future and there is a risk we may never become profitable.





We have
incurred losses and experienced negative operating cash flows since inception.
While we cannot guarantee future results, levels of activity, performance or
achievements, we expect our revenues to continue to grow in the coming quarters,
which will produce gross profits in such amounts so as to more than cover our
operating expenses.  Actual results may differ materially from those
predicted and changes in the circumstances upon which we base our predictions
could materially affect our actual results.





Our
independent registered public accounting firm, Salberg & Company,
P.A., has expressed doubt about our ability to continue as a going concern,
which may hinder our ability to obtain future financing.





Salberg
& Company, P.A., in its report of independent registered public accounting
firm for the years ended December 31, 2008 and 2007, has expressed “substantial
doubt” as to our ability to continue as a going concern based on net losses and
negative cash flows in 2008, and a working capital deficit at December 31, 2008.
Our financial statements do not include any adjustments that might result from
the outcome of that uncertainty.





We
have few proprietary rights, the lack of which may make it easier for our
competitors to compete against us.





The
exclusive Patent License Agreement being granted to the Company, as amended,
(the “License Agreement”) for our technology with Honeywell FM&T for the
system is for the life of the patent, or until terminated by Honeywell FM&T
in the event of (i) the bankruptcy of the Company; (ii) an assignment for the
benefit of creditors of the Company, (iii) the nationalization of the industry
which encompasses any of the products and/or services, limited only within the
nationalizing country; (iv) any suspension of payments hereunder by governmental
regulation, (v)  the Company’s failure to commercialize the licensed
technology under this License Agreement; (vi) or the existence of a state of war
between the United States of America and any country where the Company has a
License to manufacture products and/or services.





If
we are unable to manage our growth, our growth prospects may be limited and our
future profitability may be adversely affected.




We intend
to expand our sales and marketing programs and our manufacturing capability.
Rapid expansion may strain our managerial, financial and other resources. If we
are unable to manage our growth, our business, operating results and financial
condition could be adversely affected. Our systems, procedures, controls and
management resources also may not be adequate to support our future operations.
We will need to continually improve our operational, financial and other
internal systems to manage our growth effectively, and any failure to do so may
lead to inefficiencies and redundancies, and result in reduced growth prospects
and profitability.





We
are subject to intellectual property infringement claims, which may cause us to
incur litigation costs and divert management attention from our
business.





Any
intellectual property infringement claims against us, with or without merit,
could be costly and time-consuming to defend and divert our management’s
attention from our business. If our products were found to infringe a third
party’s proprietary rights, we could be required to enter into royalty or
licensing agreements in order to be able to sell our products. Royalty and
licensing agreements, if required, may not be available on terms acceptable to
us or at all.





The
success of our business is heavily dependent upon our ability to secure raw
plastic.





Our
ability to generate revenue depends upon our ability to secure raw plastic (PET
and HDPE).  There is a world-wide market for these materials, and the
Company faces competition from China and other low-cost users.  To the
extent that we are unable to secure enough raw plastic, our business, financial
condition and results of operations will be materially adversely
affected.




Penny
stock regulations.





The
Securities Enforcement Penny Stock Act of 1990 requires specific disclosure to
be made available in connection with trades in the stock of companies defined as
“penny stocks.” The Commission has adopted regulations that generally define a
penny stock to be any equity security that has a market price of less than $5.00
per share, subject to certain exceptions. Such exceptions include any equity
security listed on NASDAQ and any equity security issued by an issuer that has
(i) net tangible assets of at least $2,000,000, if such issuer has been in
continuous operation for three years; (ii) net tangible assets of at least
$5,000,000, if such issuer has been in continuous operation for less than three
years; or (iii) average annual revenue of at least $6,000,000, if such issuer
has been in continuous operation for less than three years. Unless an exception
is available, the regulations require the delivery, prior to any transaction
involving a penny stock, of a disclosure schedule explaining the penny stock
market and the risks associated therewith as well as the written consent of the
purchaser of such security prior to engaging in a penny stock transaction. The
regulations on penny stocks may limit the ability of the purchasers of our
securities to sell their securities in the secondary marketplace. Our common
stock is currently considered a penny stock.




We
may encounter potential environmental liability which our insurance may not
cover.





We may,
in the future, receive citations or notices from governmental authorities that
our operations are not in compliance with our permits or certain applicable
regulations, including various transportation, environmental or land use laws
and regulations. Should we receive such citations or notices, we would generally
seek to work with the authorities to resolve the issues raised by such citations
or notices. There can be no assurance, however, that we will always be
successful in this regard, and the failure to resolve a significant issue could
result in adverse consequences to us.





While we
maintain insurance, such insurance is subject to various deductible and coverage
limits and certain policies exclude coverage for damages resulting from
environmental contamination. There can be no assurance that insurance will
continue to be available to us on commercially reasonable terms, that the
possible types of liabilities that may be incurred by us will be covered by its
insurance, that our insurance carriers will be able to meet their obligations
under their policies or that the dollar amount of such liabilities will not
exceed our policy limits. An uninsured claim, if successful and of significant
magnitude, could have a material adverse effect on our business, results of
operations and financial condition.





We
will need to hire additional employees as we grow.





We will
need to hire additional employees to implement our business plan. In order to
continue to grow effectively and efficiently, we will need to implement and
improve our operational, financial and management information systems and
controls and to train, motivate and manage our employees. We intend to review
continually and upgrade our management information systems and to hire
additional management and other personnel in order to maintain the adequacy of
its operational, financial and management controls. There can be no assurance,
however, that we will be able to meet these objectives.





We
may be unable to obtain and maintain licenses or permits, zoning, environmental
and/or other land use approvals that we need to use a landfill and operate our
plants.





These
licenses or permits and approvals are difficult and time-consuming to obtain and
renew, and elected officials and citizens’ groups frequently oppose them.
Failure to obtain and maintain the permits and approvals we need to own or
operate our plants, including increasing their capacity, could materially and
adversely affect our business and financial condition.





Changes
in environmental regulations and enforcement policies could subject us to
additional liability and adversely affect our ability to continue certain
operations.





Because
the environmental industry continues to develop rapidly, we cannot predict the
extent to which our operations may be affected by future enforcement policies as
applied to existing laws, by changes to current environmental laws and
regulations, or by the enactment of new environmental laws and
regulations.  Any predictions regarding possible liability under such
laws are complicated further by current environmental laws which provide that we
could be liable, jointly and severally, for certain activities of third parties
over whom we have limited or no control.





If
environmental regulation enforcement is relaxed, the demand for our products may
decrease.





The
demand for our services is substantially dependent upon the public’s concern
with, and the continuation and proliferation of, the laws and regulations
governing the recycling of plastic. A decrease in the level of public concern,
the repeal or modification of these laws, or any significant relaxation of
regulations relating to the recycling of plastic would significantly reduce the
demand for our services and could have a material adverse effect on our
operations and financial condition.





Item
1B.                             
Unresolved Staff Comments




On February 2, 2009, the
staff of the Securities and Exchange Commission's Division of Enforcement
advised that it intends to recommend that the Commission authorize and institute
cease-and-desist proceedings against the Company to determine what remedial
actions or sanctions, if any, are to be filed against the Company based on the
Commission's findings as to whether we failed to comply with Items 307 and 308T
of Regulation S-B in our December 31, 2007 Form 10-KSB filed April 15,
2008.  Our counsel is in discussions with the SEC regarding these
Sarbanes-Oxley requirements.




Item
2.                                Properties





The
Company does not own any real property.  ECO2has
entered into a 5 year lease agreement expiring in March 2010 with a 5 year
option on a 58,000 sq. ft. steel frame building in the heavy industrial complex
building in Riverbank, California. The agreement includes 3,500 sq. ft. of
office and garage space.  In addition, the Company leases approximately
2,300 square feet of office space in San Francisco, California at 680 Second
Street, Suite 200, pursuant to the terms of a lease expiring in May
2009.





Item
3.                                Legal
Proceedings





On
February 27, 2009, Cool Clean Technologies, Inc. (“Cool Clean”) filed a
complaint against the Company in the United States District Court, District of
Minnesota.  Cool Clean is alleging breach of negotiable instrument and
breach of contract and that it is due in excess of $626,000.  The
Company was served on April 2, 2009.





The
Company is unaware of any other threatened or pending litigation against it not
in the ordinary course of business and that has not previously been
disclosed.





Item
4.                                Submission
of Matters to a Vote of Security Holders





On August
28, 2008, ECO2’s board of directors and the holders of a majority of the
outstanding shares of common stock, series A convertible preferred stock and
series B-1 convertible preferred stock of the Company, approved an amendment of
the Company’s Certificate of Incorporation, as amended, to change the number of
authorized shares to Four Billion Two Hundred Million (4,200,000,000) shares of
all classes of capital stock (the “Authorized Amount”).  Of the
Authorized Amount, Two Billion Five Hundred Million (2,500,000,000) shares are
classified as common stock and One Billion Hundred Seven Hundred Million Shares
(1,700,000,000) shares are classified as preferred stock.





Pursuant
to the Definitive Schedule 14C filed by the Company on December 5, 2008 (File
No. 033-31067), the Company amended its Certificate of Incorporation with the
State of Delaware (the “Amendment”).  On January 12, 2009, the Company
received notice from the state of Delaware confirming the
Amendment.  The Amendment was deemed effective on January 12,
2009.





Item
5.                                Market
for Registrant’s Common Equity and Related Stockholder Matters





As of
March 31, 2009, ECO2Plastics,
Inc. had 561,681,045 shares of common stock issued and outstanding and had
approximately 1,005 stockholders of record.  As of March 31, 2009
there are 155,691,168 shares of Series A convertible preferred stock and
328,630,238 shares of Series B-1 convertible preferred stock issued and
outstanding.





ECO2’s common
stock, preferred stock, warrants and convertible debt securities are not traded
on a registered securities exchange, or the NASDAQ.  The market for
our common stock and preferred stock may be affected by overhang from the
convertible debt securities and warrants. ECO2’s common
stock is quoted on the National Association of Securities Dealers OTC Bulletin
Board. The following table sets forth the range of high and low bid quotations
for each fiscal quarter for the past two (2) years. These quotations reflect
inter-dealer prices without retail mark-up, mark-down, or commissions, and may
not necessarily represent actual transactions.





FISCAL
      QUARTER
              ENDED
            
            HIGH
      BID
            
            LOW
      BIDMarch
      31, 2009
            
            $
            .02
            
            $
            .01December
      31, 2008
            
            $
            .02
            
            $
            .01September
      30, 2008
            
            $
            .02
            
            $
            .02June
      30, 2008
            
            $
            .05
            
            $
            .05March
      31, 2008
            
            $
            .05
            
            $
            .05December
      31, 2007
            
            $
            .08
            
            $
            .07September
      30, 2007
            
            $
            .15
            
            $
            .13June
      30, 2007
            
            $
            .21
            
            $
            .19March
      31, 2007 (1)
            
            $
            
            
            $








(1)
            Due
      to the Company’s name and symbol change in the first quarter of 2007, we
      are unable to obtain the high and low bid prices for that
      quarter.





On April
9, 2009, the closing price was $0.01 per share.





We have
never declared or paid cash dividends to our stockholders. We currently intend
to retain all available funds and any future earnings for use in the operation
of our business and we do not anticipate declaring or paying cash dividends for
the foreseeable future.




Securities
authorized for issuance under equity compensation plans as of December 31,
2008:




Equity
      Compensation Plan InformationPlan
      Category
            Number
      of securities to
            
            Weighted-average
            Number
      of securitiesbe
      issued upon exercise
            
            exercise
      price of
            remaining
      available forof
      outstanding options,
            
            outstanding
      options,
            future
      issuance underwarrants
      and rights (a)
            
            warrants
      and rights (b)
            equity
      compensationplans
      (excludingsecurities
      reflected incolumn
      (a))Equity
      compensation
            N/A
            
            N/A
            N/Aplans
      approved bysecurity
      holdersEquity
      compensation
            4,457,370(1)
            
            $.06
            N/Aplans
      not approved bysecurity
      holders
            15,000,000(2)
            
            Price
      as listed on the
            5,150,000OTCBB
      at the time ofissuance.19,500,000(3)
            
            $.06
            N/A1,500,000(4)
            
            $.06
            N/A750,000(5)
            
            $.06
            N/A500,000(6)
            
            $.06
            N/A1,000,000(7)
            
            $.06
            N/A12,000,000(8)
            
            $0.0975
            12,000,0005,000,000
      (9)
            
            $0.108
            N/A20,000,000
      (10)
            
            $0.015
            N/A15,000,000
      (11)
            
            $0.015
            N/A








(1)
            Consists
      of a warrant issued by the Company to Gary De Laurentiis, its former
      Director and CTO, pursuant to which Mr. De Laurentiis may purchase up to
      2,457,370 shares of common stock of the Company, exercise price of $.06
      per share and a Warrant issued by the Company pursuant to which Mr. De
      Laurentiis may purchase up to 2,000,000 shares of common stock of the
      Company at a price of $.06 per share.  These warrants were fully
      assigned and cancelled on August 11,
2005.





(2)
            2005
      Stock Plan of the Company adopted by the Board of Directors on January 28,
      2005. The 2005 Stock Plan (the “Plan”) was adopted by the Board of
      Directors as a method to compensate company employees, directors and
      non-employee independent contractors that provide services to the Company.
      The Plan is administered by two non-employee directors of the Company
      based upon recommendations for issuances by the Company’s
    CTO.





(3)
            Consists
      of a warrant issued by the Company to Gary De Laurentiis, its former
      Director and CTO, pursuant to which Mr. De Laurentiis may purchase up to
      20,000,000 shares of common stock of the Company, exercise price of $.06
      per share. While the Company authorized the warrant in the amount of
      20,000,000 shares, simultaneous with the issuance of the warrant, Mr. De
      Laurentiis transferred the rights represented by the warrant in the right
      to buy 500,000 shares of common stock of the company to another.
      Accordingly, the presentation of the warrant in this report has been
      limited to the 19,500,000 shares the right to purchase Mr. De Laurentiis
      actually received.  In connection with various assignments made
      from this warrant to other related and unrelated parties, Mr. De
      Laurentiis can purchase up to 7,384,682 shares of common stock of the
      Company in accordance with this warrant. This warrant was converted into
      shares of common stock on March 26,
2008.





(4)
            Consists
      of a warrant issued by the Company to David M. Otto, corporate counsel to
      the Company, pursuant to which Mr. Otto may purchase up to 1,000,000
      shares of common stock of the Company, exercise price of $.06 per share
      and a warrant issued by the Company to Mr. Otto pursuant to which he may
      purchase up to 500,000 shares of common stock of the Company, exercise
      price of $.06 per share. This warrant was converted into shares of common
      stock on March 26, 2008.




(5)
            Consists
      of a warrant issued by the Company to Frederick W. Smith, Jr., its former
      Chief Financial Officer, pursuant to which Mr. Smith may purchase up to
      500,000 shares of common stock of the Company, exercise price of $.06 per
      share and a warrant issued by the Company pursuant to which Mr. Smith may
      purchase up to 250,000 shares of common stock of the Company at an
      exercise price of $.06 per share. This warrant was converted into shares
      of common stock on March 26, 2008.




(6)
            Consists
      of a warrant issued by the Company to George Kanakis, a former Director,
      pursuant to which Mr. Kanakis may purchase up to 500,000 shares of common
      stock of the Company, exercise price of $.06 per
  share.




(7)
            Consists
      of a warrant issued by the Company to Jeffrey Chartier, a former Director,
      pursuant to which Mr. Chartier may purchase up to 1,000,000 shares of
      common stock of the Company, exercise price of $.06 per
    share.





(8)
            Consists
      of a warrant issued by the Company to Mario Sandoval, its former Chief
      Operating Officer who resigned, pursuant to which Mr. Sandoval may
      purchase up to 12,000,000 shares of common stock of the Company at an
      exercise price of $0.0975 per share.  This warrant was issued in
      accordance with Mr. Sandoval’s employment agreement, dated October 20,
      2006.  Under this agreement, Mr. Sandoval received a total of
      24,000,000 warrant shares, of which 17,000,000 had vested.  In
      connection with Mr. Sandoval’s departure, he agreed to return his
      previously issued common stock purchase warrant in exchange for 5,000,000
      shares of common stock, par value $0.001 per share, with a per share price
      at $0.07 per share which were filed on Form S-8 under the Securities Act
      of 1933 with the SEC.





(9)
            Consists
      of a warrant issued by the Company to Craig Hardy, its former Chief
      Financial Officer, who resigned in March 2008, pursuant to which Mr. Hardy
      may have purchased up to 5,000,000 shares of common stock of the Company
      at an exercise price of $0.108 per share/cashless.  This warrant
      was issued in accordance with Mr. Hardy’s employment agreement, dated
      August 10, 2007.  Under this agreement, Mr. Hardy was to receive
      a total of 5,000,000 warrant shares, of which 1,250,000 were converted to
      common stock on 3/26/08 and the remainder were cancelled upon his
      resignation.




(10)
            Pursuant
      to the terms of Mr. Salomon’s employment, Mr. Salomon shall be granted a
      common stock purchase warrant to acquire up to 20,000,000 shares of common
      stock of the Company with an exercise price of $0.015 per
      share.  This warrant shall vest over four years as follows: 25%
      after the twelfth month and 1/48 for each month
      thereafter.




(11)
              Pursuant
      to the terms of Mr. Janz’ employment, Mr. Janz shall be granted a common
      stock purchase warrant to acquire up to 15,000,000 shares of common stock
      of the Company with an exercise price of $0.015 per share.  This
      warrant shall vest over four years as follows: 25% after the twelfth month
      and 1/48 for each month
thereafter.




Performance
Comparison Graph





The
following graph depicts the Company’s total return to shareholders from January
2, 2004 through February 26, 2009, relative to the performance of the
Standard & Poor’s 500 Index, and the Russell MicroCap Index. All
indices shown in the graph have been reset to a base of 100 as of January 2,
2004, and assume an investment of $100 on that date and the reinvestment of
dividends paid since that date. The Company has never paid a dividend on its
common stock. The stock price performance shown in the graph is not necessarily
indicative of future price performance.











01/02/05
            
            
            01/03/06
            
            
            01/03/07
            
            
            01/02/08
            
            
            01/02/09ECO2
      Plastics, Inc.
            
            $
            0.25
            
            
            $
            0.11
            
            
            $
            0.16
            
            
            $
            0.07
            
            
            $
            0.02S&P
      500
            
            $
            1,202.08
            
            
            $
            1,268.80
            
            
            $
            1,416.60
            
            
            $
            1,447.16
            
            
            $
            931.80Russell
      MicroCap
            
            
            N/A
            
            
            $
            51.95
            
            
            $
            58.44
            
            
            $
            52.19
            
            
            $
            32.02








Recent
Sales of Unregistered Securities





During
the period covered by this 10-K, the Company sold the following securities which
were not registered under the Securities Act of 1933 (the “Act”) and not
reported on any other form:





Convertible Notes Payable
due March 2009 – During 2008, the Company received cash of approximately
$3.9 million and a promissory note with related accrued interest totaling
approximately $101,000 and in exchange issued convertible notes payable due
March 31, 2009 (the “Convertible Notes due March 2009”) of approximately $4.0
million and warrants to purchase approximately 134 million shares of Company
common stock at a per share price of $0.015 that expire in April
2015.  The Convertible Notes due March 2009 bear interest at 15%, and
are convertible into shares of Company common stock, and upon written election
at the discretion of holders of 60% or more of the aggregate principal amount of
Convertible Notes due March 2009 then outstanding, the entire principal amount
of such notes, together with all accrued interest, which shall be computed as if
such notes were held until March 31, 2009, regardless of whether converted prior
to that date, shall be converted.  If the Company has raised $1
million in new equity, the conversion price would be the lesser of 80% of the
new equity price or $0.015 per share.  If such next equity financing
has not occurred, then the conversion securities shall consist of shares of a
newly created series of Series C Convertible Preferred Stock of the Company
having rights, preferences and privileges substantially similar to those of the
Company’s Series B Stock, except that the liquidation preference shall be senior
to the Series B Stock and the Company’s Series A Convertible Preferred Stock, at
a price per share equal to $0.015 (subject to appropriate adjustment for all
stock splits, subdivisions, combination, recapitalizations and the like) until
April 2015.  The Company has pledged as collateral pursuant to terms
of a Security Agreement relating to the Convertible Notes due March 2009, as
amended and restated, substantially all of its assets, subject only to a
security interest granted to CIWMB.





Convertible
Notes Payable due December 2011


Additionally,
in 2008, the Company received cash of approximately $3.4 million and an amount
due to an officer for deferred compensation of $50,000 and in exchange issued
convertible notes payable due in December 2011 (the “Convertible Notes due
December 2011”) of approximately $3.45 million and warrants to purchase
approximately 115 million shares of Company common stock at a per share price of
$0.015 that expire in April 2015.  The Convertible Notes bear interest
at 8%.   The Convertible Notes due December 2011 are convertible
into shares of Company Series C Convertible Preferred stock, and upon written
election at the discretion of holders of 70% or more of the aggregate principal
amount of Convertible Notes due December 2011 then outstanding, the entire
principal amount of such notes, together with all accrued interest shall be
converted at a price per share equal to $0.015 (subject to appropriate
adjustment for all stock splits, subdivisions, combination, recapitalizations
and the like).  The Company has pledged as collateral pursuant to
terms of a Security Agreement relating to the Convertible Notes, as amended and
restated, substantially all of its assets, subject only to a security interest
granted to CIWMB.





Pursuant
to terms of an Amended and Restated Subordination and Intercreditor Agreement
(the “Intercreditor Agreement”) signed by purchasers of Convertible Notes due
December 2011 and certain purchasers of Convertible Notes due March 2009,
approximately $2.6 million of Convertible Notes due March 2009 are subordinate
to $3.0 million of Convertible Notes due December 2011 held by certain investors
(the “Senior Lenders”) (the “Senior Debt”); provided that so long as at the time
of and after giving effect to any such payment of principal or interest due on
subordinated debt, no Event of Default (as defined) has occurred under the
amended and restated notes, security agreements and other documents evidencing
the Convertible Notes due December 2011, or would occur as a result thereof, the
Company may make regularly scheduled payments of principal and interest on such
subordinated debt.





Other Notes
Payable  – During 2008, the Company received $300,000 cash
pursuant to terms of a short-term $300,000 promissory note bearing interest at
15%, which was repaid in full.  Additionally, during 2008, the
Company’s Chief Executive Officer loaned the Company $270,000 pursuant to terms
of short-term notes payable bearing interest at 15%, of which $175,000 was
repaid.  The remaining $95,000 and related accrued interest of
approximately $6,000 were exchanged for convertible notes payable, which were
subsequently converted into shares of the Company’s common stock.





Common Stock Issued for
Conversion of Series B-1 Convertible Preferred Stock – During 2008, a
total of 7,609,802 shares of Series B-1 Convertible Preferred Stock were
converted for that same number of shares of Company common stock.





Warrants Issued for
Services - During 2008, the Company issued to certain of its non-employee
directors warrants to purchase 750,000 shares and 1,000,000 shares of its common
stock at an exercise price of $0.22 and $0.07, respectively, with a term of
approximately 6.8 years.





In
connection with, among other things, consummation of the June 2008 financing
transactions resulting in exchanges of outstanding notes payable and receipt of
cash in consideration of the issuance of shares of the Company’s Series A and
Series B-1 Convertible Preferred Stock, the Company issued to each of two of the
Company’s new Directors warrants to purchase 10,918,072 shares of its common
stock at a per share price of $0.02 with a ten-year term.





In August
2008, the Company issued to one of its executive officers a warrant for the
purchase of 7,500,000 shares of its common stock at an exercise price of $0.02,
with a term of approximately 10 years.  The warrants vest monthly over
three years contingent upon attainment of certain specified production and other
milestones relating to future periods.  In September 2008, the officer
ceased employment with the Company, the warrants were cancelled unvested, and no
expense was recorded.





During
2008, the Company issued to a consultant warrants for the purchase of 7,500,000
shares of its common stock at an exercise price of $0.015, with a term of
approximately 6.5 years. The closing stock price at the issuable date was $0.02
per share.  In addition, during 2008, the Company issued to a
consultant warrants for the purchase of 300,000 shares of its common stock at an
exercise price of $0.02, with a term of approximately 6.5 years.





In 2008,
the Company and an individual agreed to terms of an offer of employment pursuant
to which, among other things, the individual will serve as its Senior Vice
President of Operations and in additional to cash compensation and other
customary employee related benefits received a warrant to purchase 15 million
shares of Company common stock, 25% of which vest at the end of one year and the
remainder vest equally on a monthly basis over the next three
years.  The warrants have a term of approximately 6.5 years and an
exercise price of $0.015 per.





In 2008,
the Company and an individual agreed to terms of an offer of employment pursuant
to which, among other things, the individual will serve as its Chief Financial
Officer and in additional to cash compensation and other customary employee
related benefits received a warrant to purchase 20 million shares of Company
common stock, 25% of which vest at the end of one year and the remainder vest
equally on a monthly basis over the next three years.  The warrants
have a term of approximately 6.5 years and an exercise price of $0.015 per
share.





Use of
Proceeds – Funds raised during 2008 were used for working
capital, to purchase new equipment for the Company’s proprietary CO2 cleansing
equipment and other critical spare parts and equipment and to reduce trade
payables.





Purchases
of Equity Securities by the Issuer and Affiliated Purchasers





None.








Item
6.                                Selected
Financial Data.





The
accompanying selected financial data should be read together with “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and
the accompanying financial statements and related notes that are included in
this Annual Report on Form 10-K.  The historical results are not
necessarily indicative of results to be expected for any future
period.  All amounts are presented in the table below in thousands,
except for per share amounts.




Years
      ended December 31,Statements
      of Operations Data:
                
                2008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004Revenue
                
                $
                6,690
                
                
                $
                4,339
                
                
                $
                61
                
                
                $
                -
                
                
                $
                2Cost
      of goods sold
                
                
                5,741
                
                
                
                4,220
                
                
                
                50
                
                
                
                -
                
                
                
                69Gross
      margin
                
                
                949
                
                
                
                119
                
                
                
                11
                
                
                
                -
                
                
                
                (67
                )Operating
      expensesPlant
      operations and technology development
                
                
                8,730
                
                
                
                6,877
                
                
                
                2,008
                
                
                
                303
                
                
                
                166General
      and administrative, including stock-basedcompensation
      expense of $1,305, $5,987, $10,045, $6,382 and $998
                
                
                4,504
                
                
                
                9,273
                
                
                
                12,943
                
                
                
                10,229
                
                
                
                2,117Total
      operating expenses
                
                
                13,234
                
                
                
                16,150
                
                
                
                14,951
                
                
                
                10,532
                
                
                
                2,283Loss  from
      operations
                
                
                (12,285
                )
                
                
                (16,031
                )
                
                
                (14,940
                )
                
                
                (10,532
                )
                
                
                (2,350
                )Other
      income (expense)Interest
      expense, including amortization of debt discount anddebt
      issue costs of $7,419, $14,868, $4,077, $1,853 and $0
                
                
                (8,237
                )
                
                
                (16,595
                )
                
                
                (4,740
                )
                
                
                (2,386
                )
                
                
                (273
                )Change
      in fair value liability of warrants and derivatives
                
                
                -
                
                
                
                -
                
                
                
                (1,197
                )
                
                
                (2,183
                )
                
                
                -Gain
      on extinguishment of debt
                
                
                -
                
                
                
                -
                
                
                
                117
                
                
                
                292
                
                
                
                634Other
      expense
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (248
                )Excess
      of fair value of common stock issued in exchangefor
      notes, interest and accounts payable and warrants
                
                
                (3,458
                )
                
                
                -
                
                
                
                -
                
                
                
                (516
                )
                
                
                -Total
      other income (expense)
                
                
                (11,695
                )
                
                
                (16,595
                )
                
                
                (5,820
                )
                
                
                (4,793
                )
                
                
                113Loss
      before income taxes
                
                
                (23,980
                )
                
                
                (32,626
                )
                
                
                (20,760
                )
                
                
                (15,325
                )
                
                
                (2,237
                )Income
      taxes
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Net
      loss
                
                
                (23,980
                )
                
                
                (32,626
                )
                
                
                (20,760
                )
                
                
                (15,325
                )
                
                
                (2,237
                )Beneficial
      conversion feature related to Series A andSeries
      B-1 Convertible Preferred Stock
                
                
                (8,957
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Net
      loss attributable to holders of common stock
                
                $
                (32,937
                )
                
                $
                (32,626
                )
                
                $
                (20,760
                )
                
                $
                (15,325
                )
                
                $
                (2,237
                )Net
      loss attributable to holders of common stockper
      common share, basic and diluted
                
                $
                (0.07
                )
                
                $
                (0.21
                )
                
                $
                (0.25
                )
                
                $
                (0.53
                )
                
                $
                (1.40
                )Weighted
      average shares used in computing net loss attributableto
      holders of common stock per common share, basic and
diluted
                
                
                488,614
                
                
                
                152,661
                
                
                
                84,387
                
                
                
                28,790
                
                
                
                1,595December
      31,Balance
      Sheet Data:
                
                2008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004Cash
      and cash equivalents
                
                $
                1,577
                
                
                $
                101
                
                
                $
                97
                
                
                $
                32
                
                
                $
                5Total
      current assets
                
                
                1,943
                
                
                
                1,159
                
                
                
                1,616
                
                
                
                174
                
                
                
                5Property
      and equipment, net (primarily recycling plant)
                
                
                9,104
                
                
                
                7,864
                
                
                
                5,894
                
                
                
                2,806
                
                
                
                194Total
      assets
                
                
                11,256
                
                
                
                9,515
                
                
                
                10,283
                
                
                
                3,165
                
                
                
                423Notes
      payable and capital lease obligations, net of discount (1)
                
                
                4,155
                
                
                
                15,386
                
                
                
                5,461
                
                
                
                3,717
                
                
                
                538Total
      stockholders' equity (deficit)
                
                
                4,638
                
                
                
                (11,755
                )
                
                
                2,730
                
                
                
                (6,309
                )
                
                
                (1,906
                )(1) Amounts
      presented are net of debt discount of $5,171, $4,414, $7,861, $10 and
      $0





Item
7.                                  Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.







FORWARD
LOOKING STATEMENTS CAUTIONARY





This
Item 7 and the December 31, 2008 Annual Report on Form 10-K (the “Annual
Report”) may contain "forward-looking statements." In some cases, you can
identify forward-looking statements by terminology such as "may," "will,"
"should," "could," "expects," "plans," "intends," "anticipates," "believes,"
"estimates," "predicts," "potential" or "continue" or the negative of such terms
and other comparable terminology. These forward-looking statements include,
without limitation, statements about our market opportunity, our strategies,
competition, expected activities and expenditures as we pursue our business
plan, and the adequacy of our available cash resources. Although we believe that
the expectations reflected in any forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance or
achievements. Actual results may differ materially from the predictions
discussed in these forward-looking statements. Changes in the circumstances upon
which we base our predictions and/or forward-looking statements could materially
affect our actual results. Additional factors that could materially affect these
forward-looking statements and/or predictions include, among other things: (1)
our limited operating history; (2) the risks inherent in the investigation,
involvement and acquisition of a new business opportunity; (3) unforeseen costs
and expenses; (4) our ability to comply with federal, state and local government
regulations; and (5) other factors over which we have little or no
control.





We
do not undertake any obligation to publicly update any forward-looking
statement, whether as a result of new information, future events, or otherwise,
except as required by law. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause our actual
results or achievements to be materially different from any future results or
achievements expressed or implied by such forward-looking statements. Such
factors include the factors described in Item 1A. Risk Factors included
elsewhere in this Annual Report.





Further,
in connection with, and because we desire to take advantage of, the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995, we
caution readers regarding certain forward-looking statements in the following
discussion and elsewhere in this report and in any other statement made by, or
on our behalf, whether or not in future filings with the Securities and Exchange
Commission. Forward-looking statements are statements not based on historical
information and which relate to future operations, strategies, financial results
or other developments. Forward-looking statements are necessarily based upon
estimates and assumptions that are inherently subject to significant business,
economic and competitive uncertainties and contingencies, many of which are
beyond our control and many of which, with respect to future business decisions,
are subject to change. These uncertainties and contingencies can affect actual
results and could cause actual results to differ materially from those expressed
in any forward-looking statements made by, or on our behalf.





The
following should be read in conjunction with the financial statements included
in this December 31, 2008 Annual Report on Form 10-K.





Background





ECO2Plastics,
Inc., “ECO2” or the
“Company”, was incorporated under the laws of the State of Delaware in 2000, and
formed for the purpose of acquiring certain patented technology and the
development of a worldwide market for its usage.  Wehave
developed a unique and revolutionary cleaning process, referred to as the
ECO2Environmental System (the “ECO2Environmental System”). The ECO2Environmental System cleans post-consumer plastics, without the use of
water, at a substantial cost savings versus traditional methods (the “Process”).
This Process is licensed from Honeywell and the Department of Energy on an
exclusive basis for the life of the patent. Since our inception, wehave
invested in the development of the technology and equipment comprising the
ECO2Environmental System, which includes a patent issued in 2007. This
included building several scaled up versions of the Prototype ECO2Environmental System (the “Prototype”), testing of the Prototypes,
building a pilot plant, evaluating the product produced by the Prototype and
real-time testing. Our first full scale production facility was constructed in
Riverbank, California and is now producing saleable product and ramping up, but
has not yet achieved commercial scale operations as it further develops the
process. Our goal is to build and operate plastic recycling plants in the USA
that utilize the ECO2Environmental System and to expand the ECO2Environmental System worldwide. Our growth strategy includes organic
growth, strategic acquisitions and licensing or partnership agreements, where
appropriate.





We
operate in the evolving field of plastics materials recycling. New developments
could both significantly and adversely affect existing and emerging technologies
in the field. Our success in developing marketable products and processes
and achieving a competitive position will depend on our ability to attract and
retain qualified management personnel and to raise sufficient capital to meet
its operating and development needs.  There can be no assurance that
we will be successful in accomplishing our goals.





As a
result of our new production technology beginning to come online, and to reduce
plant operating costs and use of cash during the ramp-up period, we decided to
direct most production to the new technology equipment and accordingly reduced
operations of prior technology production equipment.  Production
volumes and revenues have decreased and in the near term will remain at the
reduced levels.New technology, some still under development,
is  expected to increase throughput  as a percentage of
capacity. In connection with reducing prior technology production in
mid-November 2008, we terminated approximately 85 employees at our Riverbank
plant, thus reducing our workforce to approximately 35 employees. As projected
production volume increases over the next several months, similarly, our
workforce is expected to increase.





We have
incurred recurring losses from operations and operating activities have used
cash, and have a net working capital deficit and have had net capital
deficiencies. The Report of Independent Registered Public Accounting Firm
included in this Annual Report stated that these conditions, among others, raise
substantial doubt about the our ability to continue as a going
concern.





At
December 31, 2008, we had cash and cash equivalents of approximately $1.6
million and a working capital deficit of $3.3 million, compared to cash and cash
equivalents of approximately $101,000 and a working capital deficit of $18.6
million at December 31, 2007.  At December 31, 2008, we had total
stockholders’ equity of $4.6 million as compared with total stockholders’
deficit of $11.8 million at December 31, 2007.  While our financial
position and condition is much improved, at December 31, 2008, we do not have
sufficient cash to meet our needs for the next twelve months.





Historically,
our cash needs have been met primarily through proceeds from private
placements of our equity securities and debt instruments including debt
instruments convertible into our equity securities. During 2008, we received
approximately $15.5 million from issuances of notes payable and preferred stock,
and notes, interest and accounts payable of approximately $14.1 million were
converted into shares of our common stock.  Our Board of Directors and
Chief Executive Officer continue to be actively involved in discussions and
negotiations with investors in order to raise additional funds to finance new
production equipment, and to provide adequate working capital for operations
with a near-term goal of generating positive cash flow from
operations.  In April 2009, the Company received $100,000 cash and
expects to receive another $200,000 in cash by April 15, 2009, pursuant to
issuance of short-term, 8% notes payable to existing investors, and is
discussing future additional financings in 2009.  However, there is no
assurance that additional funds will be obtained.


In view
of these matters, continuation as a going concern is dependent upon our ability
to meet its financing requirements, raise additional capital, and the future
success of its operations.  The accompanying financial statements do
not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classifications
of liabilities that may result from the possible inability to continue as a
going concern.





Critical
Accounting Policies and Estimates





The
preparation of financial statements included in this Annual Report requires our
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period.  On an
on-going basis, management evaluates its estimates and judgments. Management
bases its estimates and judgments on historical experiences and on various other
factors that are believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying value of assets
and liabilities that are not readily apparent from other sources.  Actual
results may differ from these estimates under different assumptions or
conditions.  The more significant accounting estimates inherent in the
preparation of the our financial statements include estimates as to the
depreciable lives of property and equipment, valuation of equity related
instruments issued, and the valuation allowance for deferred income tax
assets. Our accounting policies are described in the notes to financial
statements included in this Annual Report.







We
believe that the following discussion addresses our most critical accounting
policies and estimates, which are those that we believe are most important to
the portrayal of our financial condition and results of operations and which
require our most difficult and subjective judgments, often as a result of the
need to make estimates about the effect of matters that are inherently
uncertain. We also have other policies that we consider key accounting policies;
however, these policies do not meet the definition of critical accounting
estimates because they do not generally require us to make estimates or
judgments that are difficult or subjective.





Going
concern presentation - The accompanying financial statements have
been prepared in conformity with accounting principles generally accepted in the
United States of America, which contemplate continuation of the Company as a
going concern. Since inception, we have reported losses and operating activities
have used cash, have reported net working capital deficiencies and have had net
capital deficiencies, which raises substantial doubt about our ability to
continue as a going concern. The Report of Independent Registered Public
Accounting Firm included in this Annual Report stated that these conditions,
among others, raise substantial doubt about the Company’s ability to continue as
a going concern. Our Board of Directors and management intend to raise
additional financing to fund future operations and to provide additional working
capital. However, there is no assurance that such financing will be obtained in
sufficient amounts necessary to meet our needs. The accompanying financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classifications of liabilities that may result from the outcome of this
uncertainty.





Revenue
recognition – We recognize revenue when there is persuasive evidence
of an arrangement, the product has been delivered to the customer, the sales
price is fixed or determinable, and collectability is reasonably assured. We
recognize revenues from sales of recycled products upon shipment to
customers. Amounts received in advance of when products are delivered are
recorded as liabilities until earned. Research or other types of grants from
governmental agencies or private organizations are recognized as revenues if
evidence of an arrangement exists, the amounts are determinable and
collectability is reasonably assured with no further obligations or
contingencies remaining.




Income
taxes – We account for income taxes in accordance with SFAS No. 109,
“Accounting for Income
Taxes”, which requires recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred income
taxes are recognized for the tax consequences in future years of differences
between the tax bases of assets and liabilities and their financial reporting
amounts at each period end based on enacted tax laws and statutory tax rates
applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established, when necessary, to reduce
deferred tax assets to amounts expected to be realized. We continue to provide a
full valuation allowance to reduce our net deferred tax asset to zero, inasmuch
as management has not determined that realization of deferred tax assets is more
likely than not. The provision for income taxes represents the tax payable for
the period and change during the period in net deferred tax assets and
liabilities.




Stock-based
compensation– We account for stock-based compensation in accordance with
Statement of Financial
Accounting Standard (“SFAS”) No. 123R, Accounting for Stock-Based Compensation(“FAS 123R”), which requires recording an expense over the requisite
service period for the fair value of options or warrants granted. We use
the Black-Scholes option pricing model as our method of valuation for
stock-based awards.  Our determination of the fair value of
stock-based awards on the date of grant using an option pricing model is
affected by our stock price as well as assumptions regarding a number of highly
complex and subjective variables.  These variables include, but are
not limited to, the expected stock price volatility over the term of the
award.  Although the fair value of stock-based awards is determined in
accordance with SFAS 123R, the Black-Scholes option pricing model requires the
input of highly subjective assumptions, and other reasonable assumptions could
provide differing results.





Impairment
of long-lived assets – Our management evaluates the recoverability of our
long-lived assets in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-lived Assets,” which generally requires the assessment of these
assets for recoverability when events or circumstances indicate a potential
impairment exists. Events and circumstances considered by management in
determining whether the carrying value of long-lived assets may not be
recoverable include, but are not limited to: significant changes in performance
relative to expected operating results, significant changes in the use of the
assets, significant negative industry or economic trends, a significant decline
in the Company’s stock price for a sustained period of time, and changes in our
business strategy. In determining if impairment exists, management estimates the
undiscounted cash flows to be generated from the use and ultimate disposition of
these assets. If impairment is indicated based on a comparison of the assets’
carrying values and the undiscounted cash flows, the impairment loss is measured
as the amount by which the carrying amount of the assets exceeds the fair market
value of the assets.





Accounting
for Derivatives – Management evaluates our convertible debt, options,
warrants or other contracts to determine if those contracts or embedded
components of those contracts qualify as derivatives to be separately accounted
for under Statement of Financial Accounting Standards 133 “Accounting for Derivative
Instruments and Hedging Activities” and related interpretations including
EITF 00-19 “Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company’s Own Stock”.   The result of this accounting
treatment is that under certain circumstances the fair value of the derivative
is marked-to-market each balance sheet date and recorded as a
liability.  In the event that the fair value is recorded as a
liability, the change in fair value is recorded in the statement of operations
as other income or expense.  Upon conversion or exercise of a
derivative instrument, the instrument is marked to fair value at the conversion
date and then that fair value is reclassified to equity. Equity instruments that
are initially classified as equity that become subject to reclassification under
SFAS 133 are reclassified to liability at the fair value of the instrument on
the reclassification date.





Recent
accounting pronouncements - Effective January 1, 2008, we adopted
SFAS No. 157, “Fair Value
Measurements” (“SFAS 157”), for
financial assets and liabilities. Adoption of SFAS 157 did not have a material
impact on the Company’s results of operations, financial position or liquidity.
This standard defines fair value, provides guidance for measuring fair value and
requires certain disclosures. This standard does not require any new fair value
measurements, but rather applies to all other accounting pronouncements that
require or permit fair value measurements. This standard does not apply
measurements related to share-based payments. SFAS 157 discusses valuation
techniques, such as the market approach (comparable market prices), the income
approach (present value of future income or cash flow), and the cost approach
(cost to replace the service capacity of an asset or replacement cost). The
statement utilizes a fair value hierarchy that prioritizes the inputs to
valuation techniques used to measure fair value into three broad levels. The
following is a brief description of those three levels:




Level
1: Observable inputs such as quoted prices (unadjusted) in active
markets for identical assets or liabilities.




Level
2: Inputs other than quoted prices that are observable for the asset or
liability, either directly or indirectly. These include quoted prices for
similar assets or liabilities in active markets and quoted prices for identical
or similar assets or liabilities in markets that are not active.




Level
3: Unobservable inputs that reflect the reporting entity’s own
assumptions.




Our
financial assets subject to fair value measurements at December 31, 2008 are
comprised of cash and cash equivalents of $1,577,000 all of which are valued
using Level 1 observable inputs.




In
February 2008, the Financial Accounting Standards Board, or FASB, issued FASB
Staff Position No. FAS 157-2, “Effective Date
of FASB Statement No. 157”, which provides a one year deferral of
the effective date of SFAS 157 for non-financial assets and non-financial
liabilities, except those that are recognized or disclosed in the financial
statements at fair value at least annually. We adopted the provisions of SFAS
157 with respect to its financial assets and liabilities only.





In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (“SFAS 159”), which is effective for
fiscal years beginning after November 15, 2007.  Adoption of SFAS 159
did not have a material impact on our results of operations, financial position
or liquidity.





In June
2007, the Emerging Issues Task Force of the FASB issued EITF Issue No. 07-3,
Accounting for Nonrefundable
Advance Payments for Goods or Services to be Used in Future Research and
Development Activities, (“EITF 07-3”) which is effective for fiscal years
beginning after December 15, 2007. EITF 07-3 requires that nonrefundable advance
payments for future research and development activities be deferred and
capitalized. Such amounts will be recognized as an expense as goods are
delivered or services are performed. Adoption of EITF 07-3 did not have a
material impact on the Company’s results of operations, financial position or
liquidity.




In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations”(“SFAS 141(R)”), which replaces SFAS No. 141. SFAS No. 141(R) establishes
principles and requirements for how an acquirer recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
any non-controlling interest in the acquire and the goodwill acquired. The
Statement also establishes disclosure requirements which will enable users to
evaluate the nature and financial effects of the business combination. SFAS
141(R) is effective for fiscal years beginning after December 15, 2008. The
adoption of SFAS 141(R) will have an impact on accounting for future business
combinations once adopted.




In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements – an amendment of Accounting Research Bulletin
No. 51”(“SFAS 160”), which establishes accounting and reporting
standards for ownership interests in subsidiaries held by parties other than the
parent, the amount of consolidated net income attributable to the parent and to
the noncontrolling interest, changes in a parent’s ownership interest and the
valuation of retained non-controlling equity investments when a subsidiary is
deconsolidated. The Statement also establishes reporting requirements that
provide sufficient disclosures that clearly identify and distinguish between the
interests of the parent and the interests of the non-controlling owners. SFAS
160 is effective for fiscal years beginning after December 15, 2008. In the
absence of possible future investments, application of SFAS 160 will have no
effect on our financial statements.




In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities – an amendment of SFAS No. 133.
This statement changes the disclosure requirements for derivative instruments
and hedging activities. SFAS No. 161 requires enhanced disclosures about
(a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for under SFAS
No. 133, Accounting for
Derivative Instruments and Hedging Activities, and its related
interpretations, and (c) how derivative instruments and related hedged
items affect an entity’s financial position, financial performance, and cash
flows. SFAS No. 161 is effective for the Company’s interim period beginning
January 1, 2009. We do not use derivative financial instruments nor engage
in hedging activities.  Management is currently evaluating the impact
of implementation of SFAS No. 161 on its financial position, results of
operations and cash flows.




In June
2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles. This statement identifies the sources of generally
accepted accounting principles and provides a framework, or hierarchy, for
selecting the principles to be used in preparing U.S. GAAP financial statements
for nongovernmental entities.  This statement makes the GAAP hierarchy
explicitly and directly applicable to preparers of financial
statements.  The hierarchy of authoritative accounting guidance is not
expected to change current practice but is expected to facilitate the FASB‘s
plan to designate as authoritative its forthcoming codification of accounting
standards.  This statement is effective 60 days following the SEC’s
approval of the PCAOB’s related amendments to remove the GAAP hierarchy from its
auditing standards.




In June
2008, the Emerging Issues Task Force of the FASB issued EITF Issue No. 08-4,
Transition Guidance for
Conforming Changes to Issue No. 98-05(“EITF 08-4”), which is effective
for fiscal years ending after December 15, 2008, with earlier application
permitted.  EITF 08-4 provides for, among other things, revisions to
certain provisions of EITF 98-05, including nullification of guidance under EITF
98-05 that upon conversion, unamortized discounts for instruments with
beneficial conversion features should be included in the carrying value of the
convertible security that is transferred to equity at the date of
conversion.  This nullification was made to update guidance to
acknowledge the issuance of EITF Issue No. 00-27, which revised accounting
guidance to require immediate recognition of interest expense for the
unamortized discount.   In accordance with EITF 08-4 transition,
we retrospectively applied the accounting guidance of EITF
00-27.  During 2008, certain convertible promissory notes payable were
exchanged for shares of our common stock, and as a result of adoption of EITF
0027 accounting guidance the remaining unamortized debt discount of
approximately $2.2 million was recognized as interest expense.  There
was no cumulative effect for periods prior to 2008.




In June
2008, the Emerging Issues Task Force of the FASB issued EITF Issue No. 07-5,
Determining Whether an
Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock(“EITF 07-5”), which is effective for fiscal years ending after December
15, 2008, with earlier application not permitted by entities that has previously
adopted an alternative accounting policy.  The adoption of EITF 07-5’s
requirements will affect accounting for convertible instruments and warrants
with provisions that protect holders from declines in the stock price
(“down-round” provisions).  Warrants with such provisions will no
longer be recorded in equity.  EITF 07-5 guidance is to be applied to
outstanding instruments as of the beginning of the fiscal year in which the
Issue is applied.  The cumulative effect of the change in accounting
principle shall be recognized as an adjustment to the opening balance of
retained earnings (or other appropriate components of equity) for that fiscal
year, presented separately.  The cumulative-effect adjustment is the
difference between the amounts recognized in the statement of financial position
before initial application of this Issue and the amounts recognized in the
statement of financial position at initial application of this
Issue.  The amounts recognized in the statement of financial position
as a result of the initial application of this Issue shall be determined based
on the amounts that would have been recognized if the guidance in this Issue had
been applied from the issuance date of the instrument.  Management is
in the process of determining the financial reporting effect of initial adoption
of this accounting requirement for future financial statements, and does not
expect adoption to have a material effect on our financial position, results of
operations or cash flows.




Results
of Operations





The
following table presents summary operating results information for each of the
quarters during the year ended December 31, 2008, which we believe may be
insightful and helpful in an understanding of our results of operations and its
trends and patterns (in thousands):




Three
      months ended in 2008
              
              
              Year
      endedMarch
      31
              
              
              June
      30
              
              
              September
      30
              
              
              December
      31
              
              
              December
      31Revenue
              
              $
              1,510
              
              
              $
              1,410
              
              
              $
              2,525
              
              
              $
              1,245
              
              
              $
              6,690Cost
      of goods sold
              
              
              1,593
              
              
              
              1,366
              
              
              
              1,892
              
              
              
              890
              
              
              
              5,741Gross
      margin
              
              
              (83
              )
              
              
              44
              
              
              
              633
              
              
              
              355
              
              
              
              949Operating
      expensesPlant
      operations and technology development
              
              
              1,864
              
              
              
              1,960
              
              
              
              2,764
              
              
              
              2,142
              
              
              
              8,730General
      and administrative
              
              
              1,314
              
              
              
              1,087
              
              
              
              1,162
              
              
              
              941
              
              
              
              4,504Total
      operating expenses
              
              
              3,178
              
              
              
              3,047
              
              
              
              3,926
              
              
              
              3,083
              
              
              
              13,234Loss  from
      operations
              
              
              (3,261
              )
              
              
              (3,003
              )
              
              
              (3,293
              )
              
              
              (2,728
              )
              
              
              (12,285
              )Other
      income (expense)Interest
      expense, including amortization of debt discount
              
              
              (4,879
              )
              
              
              (690
              )
              
              
              (530
              )
              
              
              (2,138
              )
              
              
              (8,237
              )Excess
      of fair value of common stock issued in exchangefor
      notes, interest and accounts payable and warrants
              
              
              (3,458
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (3,458
              )Total
      other income (expense)
              
              
              (8,337
              )
              
              
              (690
              )
              
              
              (530
              )
              
              
              (2,138
              )
              
              
              (11,695
              )Loss
      before income taxes
              
              
              (11,598
              )
              
              
              (3,693
              )
              
              
              (3,823
              )
              
              
              (4,866
              )
              
              
              (23,980
              )Income
      taxes
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Net
      loss
              
              $
              (11,598
              )
              
              $
              (3,693
              )
              
              $
              (3,823
              )
              
              $
              (4,866
              )
              
              $
              (23,980
              )Net
      loss attributable to holders of common stock (a)
              
              $
              (11,598
              )
              
              $
              (12,650
              )
              
              $
              (3,823
              )
              
              $
              (4,866
              )
              
              $
              (23,980
              )Gross
      margin as a percentage of revenue
              
              
              -5
              %
              
              
              3
              %
              
              
              25
              %
              
              
              29
              %
              
              
              14
              %(a)
      - The net loss attributable to holders of common stock for the three
      months ended June 30, 2008 has been restated from that  previously
      reported to include a $8,957 constructive dividend related to the
      beneficial conversion feature related to convertible

                  preferred
      stock. There is no effect on previously reported amounts of loss from
      operations, net loss, assets, liabilities, stockholder's equity or cash
      flows.





Comparison
of Year ended December 31, 2008 to the Year ended December 31, 2007





Revenues
were approximately $6.7 million during 2008 as compared to $4.3 in 2007.
Revenues increased due primarily to increased production volumes resulting from
processing improvements and decreasing sales of recycled products at earlier
stages of production.  Quarterly revenues approximated $1.5 million,
$1.4 million and $2.5 million during the first three quarters of 2008, which
represented increases over comparative quarters of
2007.    As a result of ceasing prior technology production
in mid-November, revenues for the fourth quarter of 2008 were approximately $1.2
million. In the near term, production volumes and revenues will decrease as the
next generation technology comes on line and then is expected to increase as
throughput increases as a percentage of capacity.





The
Company derives its revenues from certain major customers.  The loss
of major customers could potentially create a significant financial hardship for
the Company.  During the years ended December 31, 2008 and 2007, the
Company had revenues of over 10% of total revenue from individual customers as
follows (“*” means < 10%):




2008
                  
                  2007Customer
      A
                  26%
                  
                  *Customer
      B
                  21%
                  
                  24%Customer
      C
                  16%
                  
                  15%Customer
      D
                  11%
                  
                  *Customer
      E
                  *
                  
                  40%Customer
      F
                  *
                  
                  10%





In
November 2008, we entered into a supply agreement with a company (the
“Purchaser”), which holds approximately $1.5 million of our Convertible Notes
due December 2011 and warrants to purchase approximately 50 million shares of
our common stock, and which has the right to and has designated a person to be a
member of our Board of Directors.  Pursuant to terms of the Supply
Agreement, among other things, if the Purchaser is in need of at least 1.5
million pounds of Products (as defined) for any calendar month during the three
year term, then they shall order their requirements for 1.5 million pounds from
us, and we have agreed to sell Products in accordance to a contractual pricing
formula.  During 2008, our revenues from Purchaser approximated $1.7
million.





Cost of
goods sold consists of the cost of raw materials processed and was approximately
$5.7 million during 2008 as compared to $4.2 million during 2007. There was a
gross profit of $949,000 in 2008 as compared to $119,000 in 2007.  As
a percent of revenues, gross profit was 14% and 3% in 2008 and 2007,
respectively.  The plant operated at higher levels of production for
most of the year during 2008 as compared to 2007 as a result of process
improvements to increase capacity and yield.  In 2008, most of the
output was shipped at market prices and the cost of raw materials decreased
slightly.





Plant
operations and technology development expenses increased to $8.7 million in 2008
as compared to $6.9 million during 2007 due to increased
production.  Operating expenses are comprised primarily of payroll and
related, utilities, occupancy, supplies, and repairs and maintenance
expenses.  Payroll and related costs approximated $2.9 million during
2008 as compared to $2.4 million during 2007, and depreciation expense
approximated $1.4 million during 2008 as compared to $1.0 million in
2007.  Other plant operating expenses approximated $4.4 million during
2008 as compared to $3.5 million during 2007, and also in 2008 included a
$252,000 impairment provision for long-lived assets. As production volumes
approach maximum capacity, certain plant operating expenses will be included in
cost of goods sold.





General
and administrative expenses decreased to $4.5 million in 2008 as compared to
$9.3 million during 2007.  Payroll and related costs approximated $2.3
million during 2008 as compared to $6.4 million in 2007.  The decrease
in 2008 payroll and related was primarily due to higher non-cash stock-based
compensation in 2007 as compared to 2008 relating to employment agreements
equity awards with certain executive officers and related recruiter fees payable
in equity securities.  Consulting and legal fees expenses approximated
$882,000 during 2008 as compared to $759,000 during 2007.   Also
included in general and administrative expenses in 2007 is $680,000, the result
of issuances of equity securities in connection with a settlement
agreement.





As a
result of the above described increase in gross profit, increase in plant
operations and technology development expenses, decrease in general and
administrative expenses and the absence of settlement expense in 2007, our loss
from operations decreased to $12.3 million in 2008 from $16.0 million during
2007.





We
recorded interest expense of approximately $8.2 million during 2008 as compared
to $16.6 million during 2007.  Interest expense includes amortization of
debt issue costs and debt discount of approximately $7.4 million during 2008 and
$14.9 million during 2007.  The decrease in interest expense for 2008
as compared to 2007 was primarily due to note conversions in 2008 and last half
of 2007.




Our net
loss decreased to approximately $24.0 million for the year ended December 31,
2008 from $32.6 million for 2007, due primarily to the $3.7 million decrease in
loss from operations and $8.4 million decrease in interest expense, offset by a
$3.5 million of other expense recorded in 2008 representing the excess of fair
value of common stock issued in exchange for accounts payable, notes payable,
accrued interest and warrants.





Our $32.9
million net loss attributable to holders of common stock results from the
deduction from net loss of $9 million of constructive dividends relating to
beneficial conversion features related to issuances of Series A and Series B-1
convertible preferred stock.





We have
approximately $45 million of net operating loss carry-forwards at December 31,
2008 potentially available to offset future federal income taxes which expire
through 2028.  Realization is dependent on generating sufficient taxable
income prior to expiration of the loss carry-forwards.  A change of greater
than 50% of the Company ownership could significantly limit the utilization of
these loss carryforwards.  We continue to provide a full valuation
allowance to reduce its net deferred tax asset to zero, inasmuch as management
has not determined that realization of deferred tax assets is more likely than
not.





Inflation





Although our operations
are influenced by general economic conditions, we do not believe that inflation
had a material effect on our results of operations.





Liquidity
and Capital Resources





Sources
of Cash





Historically,
our cash needs have been met primarily through proceeds from private
placements of our equity securities and debt instruments including debt
instruments convertible into our equity securities. During 2008, we received
approximately $15.5 million from issuances of notes payable and preferred stock,
and notes, interest and accounts payable of approximately $14.1 million were
converted into shares of our common stock.    During 2007,
we received approximately $11.1 million from sales of notes and
warrants.  Significant financing transactions accomplished in 2008
include the following:





·
            We
      received cash of approximately $3.4 million pursuant to issuance of
      short-term notes payable to new and existing investors (subsequently
      exchanged for equity);


·
            Holders
      of all convertible notes payable outstanding at June 2008 having a
      total principal amount outstanding of approximately $13.2 million,
      together with accrued interest of approximately $1.7 million, converted
      such notes and returned to the Company warrants to purchase
      approximately 38.6 million shares of common stock  at $0.06
      per share and in exchange received approximately 243.9 million shares of
      our common stock;


·
            Pursuant
      to terms of a special offer made to all holders of warrants to purchase
      common stock, approximately 124.2 million warrants were exchanged 
      for approximately 81.9 million shares of our common
  stock;


·
            We
      entered into agreements with certain service providers pursuant to which
      we issued approximately 15.9 million shares of our common stock as payment
      for amounts owed for services of approximately
  $754,000;


·
            Holders
      of promissory notes having a principal amount of approximately $7.5
      million, together with related accrued interest of $525,000, exchanged
      such notes for 152,000,000 shares of our Series A Preferred Stock and
      111,240,040 shares of our Series B-1 Preferred
  Stock;


·
            We
      received cash of $4.5 million relating to the sale and issuance of
      225,000,000 shares of our Series B-1 Preferred
  Stock;


·
            We
      received cash of approximately $4.0 million relating to issuance of $4.0
      million convertible 15% notes payable due March 2009 and warrants to
      purchase approximately 134 million shares of our common stock at $0.015
      per share; and


·
            We
      received cash of approximately $3.4 million relating to issuance of $3.4
      million convertible 8% notes payable due December 2011 and warrants to
      purchase approximately 115 million shares of our common stock at $0.015
      per share.




Cash Provided (Used) by Operating,
Investing and Financing Activities





During
the year ended December 31, 2008 cash used by operating activities increased to
approximately $9.9 million from $7.2 million during 2007, due primarily
decreases in accounts payable in 2008 of approximately $1.2 million as compared
to increases of $2.6 million in 2007.





During
2008, cash used by investing activities decreased to $2.9 million relating to
capital expenditures on the recycling plant as compared to $3.2 million during
2007. Expenditures during 2008 have primarily related to process
improvements.  Expenditures during 2007 primarily related to
additional capacity and process improvements.





During
2008, cash provided by financing activities was approximately $14.2 million as
compared to $10.4 million during 2007. During 2008, we received cash of
approximately $11.0 million pursuant to issuance of notes payable to new and
existing investors and $4.5 million pursuant to issuances of preferred
stock.  During 2008, we repaid $475,000 of short-term notes payable
and incurred stock issue costs and debt issue costs of $242,000 and $266,000,
respectively.  During 2007, we received proceeds of approximately
$11.1 million from sales of private placement units comprised of convertible
promissory notes and warrants. During 2007, we repaid $300,000 of short-term
notes payable and incurred debt issue costs of $169,000.





Liquidity





At
December 31, 2008, we had cash and cash equivalents of approximately $1.6
million and a working capital deficit of $3.3 million, compared to cash and cash
equivalents of approximately $101,000 and a working capital deficit of $18.6
million at December 31, 2007.  At December 31, 2008, we had total
stockholders’ equity of $4.6 million as compared with total stockholders’
deficit of $11.8 million at December 31, 2007.  While our financial
position and condition is much improved, at December 31, 2008, we do not have
sufficient cash to meets our needs for the next twelve months.





Our Board
of Directors and Chief Executive Officer continue to be actively involved in
discussions and negotiations with investors in order to raise additional funds
to finance new equipment, and to provide adequate working capital for operations
with a near-term goal of generating positive cash flow from
operations.  However, there is no assurance that such financing will
be obtained. In April 2009, the Company received $100,000 cash and expects to
receive another $200,000 in cash by April 15, 2009, pursuant to issuance
of short-term, 8% promissory notes to existing investors and is
discussing future additional financings in 2009. These
funds provide the Company enough cash to operate through early May 2009 and the
Company is attempting to raise additional financing during that time
period.




Contractual
Obligations





We have contractual
obligations in the form of facility leases, notes payable, and royalty
obligations.  The following summarizes the principal payment component
of our contractual obligations at December 31, 2008 (in thousands):





Payments
      due by year2014
      andContractual
      obligations
              
              2009
              
              
              2010
      to 2011
              
              
              2012
      to 2013
              
              
              thereafter
              
              
              TotalNotes
      payable (1)
              
              $
              4,224
              
              
              $
              3,897
              
              
              $
              489
              
              
              $
              368
              
              
              $
              8,978Operating
      leases
              
              
              468
              
              
              
              115
              
              
              
              -
              
              
              
              -
              
              
              
              583Purchase
      obligations (2)
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Other
      (3) (4)
              
              
              300
              
              
              
              600
              
              
              
              600
              
              
              
              600
              
              
              
              2,100$
              4,992
              
              
              $
              4,612
              
              
              $
              1,089
              
              
              $
              968
              
              
              $
              11,661(1)
      - Excludes contractual interest payments.(2)
      - At December 31, 2008, we do not have open purchase orders of
      significance.(3)
      - Represents minimum annual royalties due under the Honeywell technology
      license agreement, which suchsuch
      royalties are for the life of the agreement, which is for the life of the
      patent. Presented through 2015.(4)
      - Excludes Participation Certificates obligations issued prior to
      2004. See Note 9 to our financial statements.




Off-Balance
Sheet Arrangements





We
do not have any off balance sheet arrangements that have or are likely to have a
material current or future effect on our financial condition, or changes in
financial condition, liquidity or capital resources or
expenditures.





Item
7A.                      Quantitative
and Qualitative Disclosures about Market Risk.





We do not
use derivative financial instruments. Our financial instruments consist of cash
and cash equivalents, trade accounts receivable, accounts payable and short and
long-term borrowing obligations. Investments in highly liquid instruments
purchased with a remaining maturity of 90 days or less at the date of purchase
are considered to be cash equivalents.





Our
exposure to market risk for changes in interest rates relates primarily to our
cash and cash equivalents and short and long-term obligations, all of which have
fixed interest rates. Thus, fluctuations in interest rates would not have a
material impact on the fair value of these securities.  Based on our
cash and cash equivalents balances at December 31, 2008, a 100 basis point
increase or decrease in interest rates would result in an immaterial increase or
decrease in interest income on an annual basis.





Cash and
cash equivalents are maintained at financial institutions and, at times,
balances may exceed federally insured limits.  We have never
experienced any losses related to these balances.  Amounts on deposit
in excess of federally insured limits at December 31, 2008 approximated
$870,000.











Item
8.                      Financial
Statements and Supplementary Data.







Report
      of Independent Registered Public Accounting Firm
            F-1Financial
      StatementsBalance
      Sheets at December 31, 2008 and 2007
            F-2Statements
      of  Operations for the years ended December 31, 2008
      and  2007
            F-3Statement
      of Changes in Stockholders’ Equity (Deficit) for the years ended December
      31, 2008 and 2007
            F-4Statements
      of Cash Flows for the years ended December 31, 2008 and
      2007
            F-5Notes
      to Financial Statements
            F-6









Report
of Independent Registered Public Accounting Firm








To the
Board of Directors and Shareholders of:


ECO2
Plastics, Inc.:





We have
audited the accompanying balance sheets of ECO2 Plastics, Inc. as of December
31, 2008 and 2007, and the related statements of operations, changes in
stockholders' equity (deficit), and cash flows for each of the years in the
two-year period ended December 31, 2008.  These financial statements
are the responsibility of the Company's management.  Our
responsibility is to express an opinion on these financial statements based on
our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.





In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of ECO2 Plastics, Inc. as of December
31, 2008 and 2007, and the results of its operations and its cash flows for each
of the years in the two-year period ended December 31, 2008 in conformity with
accounting principles generally accepted in the United States of
America.





The
accompanying financial statements have been prepared assuming the Company will
continue as a going concern.  As discussed in Note 1 to the financial
statements, the Company has reported net losses from inception, including a net
loss of approximately $24.0 million and used cash for operating activities of
approximately $9.9 million during the year ended December 31, 2008, and, as of
December 31, 2008, had a working capital deficiency of approximately $3.3
million and an accumulated deficit of approximately $102.8
million.  These matters raise substantial doubt about the Company’s
ability to continue as a going concern.  Management's plans as to
these matters are also described in Note 1.  The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.





SALBERG
& COMPANY, P.A.





Boca
Raton, Florida


March 19,
2009 (except for the last paragraph of Note 11, as to which the date is April
13, 2009)


F-1




ECO2
      Plastics, Inc.Balance
      Sheets(in
      thousands, except share and per share data)December
      31,2008
              
              
              2007Current
      assets:Cash
      and cash equivalents
              
              
              $
              1,577
              
              
              $
              101Accounts
      receivable, net of allowance of $10 and $48
              
              
              
              318
              
              
              
              581Inventories
              
              
              
              48
              
              
              
              475Prepaid
      expenses and other current assets
              
              
              
              -
              
              
              
              2Total
      current assets
              
              
              
              1,943
              
              
              
              1,159Property
      and equipment, net
              
              
              
              9,104
              
              
              
              7,864Deferred
      debt issue costs, net
              
              
              
              139
              
              
              
              445Other
      assets
              
              
              
              70
              
              
              
              47Total
      assets
              
              
              $
              11,256
              
              
              $
              9,515Current
      liabilities:Accounts
      payable
              
              
              $
              1,481
              
              
              $
              2,900Accounts
      payable to related parties
              
              
              
              132
              
              
              
              692Accrued
      liabilities
              
              
              
              651
              
              
              
              645Accrued
      interest on notes payableDue
      to related parties
              
              
              
              134
              
              
              
              846Due
      to others
              
              
              
              65
              
              
              
              801Notes
      payable, net of debt discountDue
      to related parties, net of debt discount of $1,171 and
    $1,856
              
              
              
              1,455
              
              
              
              7,415Due
      to others, net of debt discount of $597 and $2,558
              
              
              
              792
              
              
              
              5,910Current
      portion of note payable to California Integrated Waste Management Board
      (CIWMB)
              
              
              209
              
              
              
              200Participation
      Certificates obligations issued prior to 2004
              
              
              
              354
              
              
              
              354Total
      current liabilities
              
              
              
              5,273
              
              
              
              19,763Non-current
      liabilities:Note
      payable to CIWMB, net of current portion and debt discount
              
              
              
              1,299
              
              
              
              1,507Convertible
      notes payable, net of debt discountDue
      to related parties, net of debt discount of $3,078
              
              
              
              41
              
              
              
              -Due
      to others, net of debt discount of $324
              
              
              
              5
              
              
              
              -Total
      non-current liabilities
              
              
              
              1,345
              
              
              
              1,507Total
      liabilities
              
              
              
              6,618
              
              
              
              21,270Commitments
      and contingencies (Note 10)Stockholders'
      equity (deficit)Preferred
      stock, $0.001 par value, 1,700,000,000 shares authorized,Series
      A convertible, 152,843,414 shares authorized, issued andoutstanding,
      preference in liquidation $4,585
              
              
              
              153
              
              
              
              -Series
      B-1 convertible, 336,240,039 shares authorized, 328,630,238
      sharesissued
      and outstanding, preference in liquidation $6,573
              
              
              
              329
              
              
              
              -Series
      B-2 convertible, 140,000,000 shares authorized, none issued and
      outstanding
              
              
              -
              
              
              
              -Series
      C convertible, 400,000,000 shares authorized, none issued and
      outstanding
              
              
              -
              
              
              
              -Common
      stock, $0.001 par value, 2,500,000,000 shares authorized,556,453,298
      and 190,920,594 shares issued and outstanding
              
              
              
              557
              
              
              
              191nil
      and 7,180,000 shares issuable
              
              
              
              -
              
              
              
              7Additional
      paid-in capital
              
              
              
              106,351
              
              
              
              66,843Deferred
      stock-based consulting
              
              
              
              -
              
              
              
              (24
              )Accumulated
      deficit
              
              
              
              (102,752
              )
              
              
              (78,772
              )Total
      stockholders' equity (deficit)
              
              
              
              4,638
              
              
              
              (11,755
              )Total
      liabilities and stockholders' equity (deficit)
              
              
              $
              11,256
              
              
              $
              9,515See
      accompanying notes to financial
statements


F-2




ECO2
      Plastics, Inc.Statements
      of Operations(in
      thousands, except per share data)Years
      ended December 31,2008
              
              
              2007Revenue
              
              $
              6,690
              
              
              $
              4,339Cost
      of goods sold
              
              
              5,741
              
              
              
              4,220Gross
      margin
              
              
              949
              
              
              
              119Operating
      expensesPlant
      operations and technology development
              
              
              8,730
              
              
              
              6,877General
      and administrative, including stock-basedcompensation
      expense of $1,305 and $5,987
              
              
              4,504
              
              
              
              9,273Total
      operating expenses
              
              
              13,234
              
              
              
              16,150Loss  from
      operations
              
              
              (12,285
              )
              
              
              (16,031
              )Other
      income (expense)Interest
      expense, including amortization of debt discount anddebt
      issue costs of $7,419 and $14,868
              
              
              (8,237
              )
              
              
              (16,595
              )Excess
      of fair value of common stock issued in exchangefor
      notes, interest and accounts payable and warrants
              
              
              (3,458
              )
              
              
              -Total
      other income (expense)
              
              
              (11,695
              )
              
              
              (16,595
              )Loss
      before income taxes
              
              
              (23,980
              )
              
              
              (32,626
              )Income
      taxes
              
              
              -
              
              
              
              -Net
      loss
              
              
              (23,980
              )
              
              
              (32,626
              )Beneficial
      conversion feature related to Series A andSeries
      B-1 Convertible Preferred Stock
              
              
              (8,957
              )
              
              
              -Net
      loss attributable to holders of common stock
              
              $
              (32,937
              )
              
              $
              (32,626
              )Net
      loss attributable to holders of common stockper
      common share, basic and diluted
              
              $
              (0.07
              )
              
              $
              (0.21
              )Weighted
      average shares used in computing net loss attributableto
      holders of common stock per common share, basic and
diluted
              
              
              488,613,632
              
              
              
              152,660,718See
      accompanying notes to financial statements.




F-3




ECO2
      Plastics, Inc.Statement
      of Changes in Stockholders' Equity (Deficit)For
      the Years Ended December 31, 2008 and 2007(in
      thousands, except share data)Convertible
      Preferred Stock
              
              
              
              
              
              Common
      Stock
              
              Additional
              
              
              DeferredSeries
      A
              
              Series
      B-1
              
              Common
      stock
              
              Issuable
              
              paid-in
              
              
              stock-based
              
              
              AccumulatedShares
              
              Amount
              
              Shares
              
              Amount
              
              Shares
              
              Amount
              
              Shares
              
              Amount
              
              capital
              
              
              consulting
              
              
              deficit
              
              
              TotalBalance
      at December 31, 2006
              
              
              
              
              
              
              
              
              
              
              114,263,824
              
              $
              114
              
              
              15,083,715
              
              $
              15
              
              $
              48,747
              
              
              $
              -
              
              
              $
              (46,146
              )
              
              $
              2,730Issuance
      of shares recorded as issuable in 2006
              
              
              
              
              
              
              
              
              
              
              15,083,715
              
              
              15
              
              
              (15,083,715
              )
              
              (15
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              -Value
      of warrants issued with notes payable
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              8,961
              
              
              
              
              
              
              
              
              
              
              
              8,961Shares
      issued for warrant exercises
              
              
              
              
              
              
              
              
              
              
              4,119,596
              
              
              4
              
              
              
              
              
              
              
              
              (2
              )
              
              
              
              
              
              
              
              
              
              
              2Shares
      issued upon conversion of notes payableand
      related accrued interest
              
              
              
              
              
              
              
              
              
              
              32,730,740
              
              
              33
              
              
              
              
              
              
              
              
              3,159
              
              
              
              
              
              
              
              
              
              
              
              3,192Share
      based payments -Shares
      issued and issuable for services
              
              
              
              
              
              
              
              
              
              
              4,890,411
              
              
              5
              
              
              180,000
              
              
              -
              
              
              898
              
              
              
              (24
              )
              
              
              
              
              
              
              879Warrants
      issued for services
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              279
              
              
              
              
              
              
              
              
              
              
              
              279Warrants
      issued for executive compensation
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              204
              
              
              
              
              
              
              
              
              
              
              
              204Shares
      vested for executive compensation
              
              
              
              
              
              
              
              
              
              
              13,240,000
              
              
              13
              
              
              
              
              
              
              
              
              (13
              )
              
              
              
              
              
              
              
              
              
              
              -Shares
      issued for executive compensation
              
              
              
              
              
              
              
              
              
              
              1,100,000
              
              
              1
              
              
              
              
              
              
              
              
              291
              
              
              
              
              
              
              
              
              
              
              
              292Shares
      issuable for executive compensation
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              7,000,000
              
              
              7
              
              
              402
              
              
              
              
              
              
              
              
              
              
              
              409Shares
      issued for accrued compensation
              
              
              
              
              
              
              
              
              
              
              492,308
              
              
              1
              
              
              
              
              
              
              
              
              132
              
              
              
              
              
              
              
              
              
              
              
              133Shares
      issued for settlement
              
              
              
              
              
              
              
              
              
              
              5,000,000
              
              
              5
              
              
              
              
              
              
              
              
              670
              
              
              
              
              
              
              
              
              
              
              
              675Stock-based
      compensation expense
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              3,115
              
              
              
              
              
              
              
              
              
              
              
              3,115Net
      loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (32,626
              )
              
              
              (32,626
              )Balance
      at December 31, 2007
              
              
              
              
              
              
              
              
              
              
              190,920,594
              
              
              191
              
              
              7,180,000
              
              
              7
              
              
              66,843
              
              
              
              (24
              )
              
              
              (78,772
              )
              
              
              (11,755
              )Amortization
      of deferred stock-based consulting
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              24
              
              
              
              
              
              
              
              24Value
      of warrants issued with notes payable
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              540
              
              
              
              
              
              
              
              
              
              
              
              540Stock-based
      compensation expense
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,086
              
              
              
              
              
              
              
              
              
              
              
              1,086Shares
      issued in exchange for accounts payable
              
              
              
              
              
              
              
              
              
              
              15,944,077
              
              
              16
              
              
              
              
              
              
              
              
              813
              
              
              
              
              
              
              
              
              
              
              
              829Shares
      vested for executive compensation
              
              
              
              
              
              
              
              
              
              
              7,700,000
              
              
              8
              
              
              
              
              
              
              
              
              (8
              )
              
              
              
              
              
              
              
              
              
              
              -Shares
      issued in exchange for notes payable,accrued
      interest and warrants
              
              
              
              
              
              
              
              
              
              
              325,853,917
              
              
              326
              
              
              
              
              
              
              
              
              17,786
              
              
              
              
              
              
              
              
              
              
              
              18,112Issuance
      of shares previously recorded as issuable
              
              
              
              
              
              
              
              
              
              
              7,000,000
              
              
              7
              
              
              (7,000,000
              )
              
              (7
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              -Preferred
      shares issued in exchange for:Notes
      payable and related accrued interest
              
              
              152,843,414
              
              $
              153
              
              
              111,240,040
              
              $
              111
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              7,598
              
              
              
              
              
              
              
              
              
              
              
              7,862Cash
              
              
              
              
              
              
              
              
              165,000,000
              
              
              165
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              3,135
              
              
              
              
              
              
              
              
              
              
              
              3,300"old"
      Series A preferred stock
              
              
              
              
              
              
              
              
              60,000,000
              
              
              60
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,140
              
              
              
              
              
              
              
              
              
              
              
              1,200Stock
      issue costs
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (242
              )
              
              
              
              
              
              
              
              
              
              
              (242
              )Decrease
      in shares issuable
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (357,143
              )
              
              -
              
              
              (180,000
              )
              
              -
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              -Value
      of beneficial conversion feature and warrantsissued
      with convertible notes payable
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              7,464
              
              
              
              
              
              
              
              
              
              
              
              7,464Value
      of warrants issued for services
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              144
              
              
              
              
              
              
              
              
              
              
              
              144Shares
      issued in connection with separation agreement
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,500,000
              
              
              3
              
              
              
              
              
              
              
              
              65
              
              
              
              
              
              
              
              
              
              
              
              68Shares
      returned and cancelled in connectionwith
      separation agreement
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (717,949
              )
              
              (1
              )
              
              
              
              
              
              
              
              (13
              )
              
              
              
              
              
              
              
              
              
              
              (14
              )Shares
      issued upon conversion of preferred stock
              
              
              
              
              
              
              
              
              (7,609,802
              )
              
              (7
              )
              
              7,609,802
              
              
              7
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              -Net
      loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (23,980
              )
              
              
              (23,980
              )Balance
      at December 31, 2008
              
              
              152,843,414
              
              $
              153
              
              
              328,630,238
              
              $
              329
              
              
              556,453,298
              
              $
              557
              
              
              -
              
              $
              -
              
              $
              106,351
              
              
              $
              -
              
              
              $
              (102,752
              )
              
              $
              4,638See
      accompanying notes to financial statements.
  F-4




ECO2
      Plastics, Inc.Statements
      of Cash Flows(in
      thousands)Years
      ended December 31,2008
              
              
              2007Cash
      flows from operating activities:Net
      loss
              
              $
              (23,980
              )
              
              $
              (32,626
              )Adjustments
      to reconcile net loss to net cash used by operating
      activities:Depreciation
      and amortization
              
              
              1,439
              
              
              
              1,135Impairment
      of long-lived assets
              
              
              252
              
              
              
              -Excess
      of fair value of common stock issued and issuable in
    exchangefor
      accounts payable, notes payable, accrued interest and
    warrants
              
              
              3,458
              
              
              
              -Stock-based
      compensation and settlement expense
              
              
              1,328
              
              
              
              5,987Change
      in fair value of warrants and derivatives
              
              
              -
              
              
              
              -Amortization
      of debt issue costs  and discount
              
              
              7,419
              
              
              
              14,868Changes
      in operating assets and liabilities:Accounts
      receivable
              
              
              263
              
              
              
              (580
              )Inventory
              
              
              427
              
              
              
              (262
              )Prepaid
      expenses and other assets
              
              
              (21
              )
              
              
              50Accounts
      payable
              
              
              (1,247
              )
              
              
              2,590Accrued
      liabilities
              
              
              798
              
              
              
              1,538Other
              
              
              (13
              )
              
              
              106Net
      cash used by operating activities
              
              
              (9,877
              )
              
              
              (7,194
              )Cash
      flows from investing activities:Purchase
      of property, plant & equipment
              
              
              (2,932
              )
              
              
              (3,201
              )Net
      cash used by investing activities
              
              
              (2,932
              )
              
              
              (3,201
              )Cash
      flows from financing activities:Decrease
      in restricted cash in CIWMB escrow
              
              
              -
              
              
              
              -Payments
      on CIWMB note payable
              
              
              (200
              )
              
              
              (191
              )Proceeds
      from issuance of notes payable
              
              
              10,968
              
              
              
              11,057Principle
      payments on notes payable
              
              
              (475
              )
              
              
              (300
              )Proceeds
      from issuance of preferred stock
              
              
              4,500
              
              
              
              -Proceeds
      from exercise of warrants
              
              
              -
              
              
              
              2Payments
      of stock issue costs
              
              
              (242
              )
              
              
              -Payments
      of debt issue costs
              
              
              (266
              )
              
              
              (169
              )Net
      cash provided  by financing activities
              
              
              14,285
              
              
              
              10,399Net
      increase in cash and cash equivalents
              
              
              1,476
              
              
              
              4Cash
      and cash equivalents, beginning of year
              
              
              101
              
              
              
              97Cash
      and cash equivalents, end of year
              
              $
              1,577
              
              
              $
              101Supplemental
      disclosures of cash flow information:Cash
      paid for interest
              
              $
              91
              
              
              $
              78Cash
      paid for income taxes
              
              $
              -
              
              
              $
              -Supplemental
      disclosures of non-cash investing and financing
activities:Debt
      discount
              
              $
              8,003
              
              
              $
              8,413Deferred
      debt issue costs
              
              $
              -
              
              
              $
              82Common
      stock exchanged for notes payable, accrued interest and
      warrants
              
              $
              13,031
              
              
              $
              -Common
      stock exchanged for accounts payable and accrued
    liabilities
              
              $
              754
              
              
              $
              750Preferred
      stock exchanged for notes payable and accrued interest
              
              $
              7,862
              
              
              $
              -Common
      stock exchanged for preferred stock
              
              $
              152
              
              
              $
              -Common
      stock issued for debt conversion and settlement
              
              $
              -
              
              
              $
              3,116Constructive
      Dividend
              
              $
              8,957
              
              
              $
              -See
      accompanying notes to financial
statements.




F-5


ECO2 Plastics,
Inc.


Notes
to Financial Statements


As
of December 31, 2008 and 2007 and for the years then ended





Note
1. Description of Business and Summary of Significant Accounting
Policies




Organization and
Business – ECO2 Plastics,
Inc., (“ECO2”) or the
(“Company”) was incorporated under the laws of the State of Delaware in 2000,
and formed for purposes of acquiring certain patented technology and development
of a worldwide market.  ECO2 has
developed a unique and revolutionary process referred to as the Eco2TM
Environmental System (the “Eco2
Environmental System”). The Eco2
Environmental System cleans post-consumer plastics, without the use of water, at
a substantial cost savings versus traditional methods (the “Process”). This
Process is both patented and patent-pending and is licensed from Honeywell
Federal Manufacturing & Technologies, LLC (“Honeywell”) and the Department
of Energy on an exclusive basis for the patent life. Since its inception,
ECO2has invested in the development of the technology and equipment
comprising the Eco2
Environmental System, which includes a “Process Patent” granted in 2007. This
included building several scaled up versions of the Prototype Eco2
Environmental System (the “Prototype”), testing of the Prototypes, building a
pilot plant, evaluating the product produced by the Prototype and real-time
testing. The Company’s first full scale production facility was constructed in
Riverbank, California and is now producing saleable product and ramping up to
commerical scale operations as it further develops the
process.  ECO2’s goal is
to build and operate plastic recycling plants in the USA that utilize the
Eco2
Environmental System and to expand the Eco2
Environmental System worldwide. ECO2’s growth
strategy includes organic growth, strategic acquisitions and licensing or
partnership agreements, where appropriate.





Business risks and
uncertainties - The Company operates in the evolving field of plastics
materials recycling and its business is reliant on its licensing of technology
from Honeywell. New developments could both significantly and adversely affect
existing and emerging technologies in the field. The Company's success in
developing additional marketable products and processes and achieving a
competitive position will depend on, among other things, its ability to attract
and retain qualified management personnel and to raise sufficient capital to
meet its operating and development needs. There can be no assurance that the
Company will be successful in accomplishing its objectives.





Basis of presentation and
Going
Concern - The accompanying financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America, which contemplate the Company’s continuation as a going concern. Since
inception, the Company has reported losses and operating activities have used
cash, and it has a working capital deficiency that has raised substantial doubt
about its ability to continue as a going concern. The Company reported a net
loss of approximately $24.0 million for the year ended December 31, 2008, and
operating activities used cash of approximately $9.9 million during the year
ended December 31, 2008 and as of December 31, 2008, had a working capital
deficit of $3.3 million and accumulated losses from inception of $102.8
million.




The
Company’s Board of Directors and Chief Executive Officer continue to be actively
involved in discussions and negotiations with investors in order to raise
additional funds to finance new equipment, and to provide adequate working
capital for operations with a near-term goal of generating positive cash flow
from operations.  During the three months ended December 31, 2008, the
Company received approximately $3.4 million from new and existing investors in
exchange for convertible notes payable bearing interest at 8%, due in December
2011 and collateralized by a pledge of substantially all of the Company’s
assets, subordinate only to CIWMB borrowings, and warrants to purchase
approximately 113 million shares of Company common stock at $0.015 per
share.   During the three months ended September 30, 2008, the
Company received approximately $3.9 million from new and existing investors in
exchange for convertible notes payable bearing interest at 15%, due in March
2009 and collateralized by a pledge of substantially all of the Company’s
assets, subordinate only to CIWMB borrowings, and warrants to purchase
approximately 129 million shares of Company common stock at $0.015 per
share.   During the three months ended June 30, 2008, the Company
received $1.2 million from loans from new and existing investors, and received
$4.5 million from sales of 225 million shares of its convertible preferred
stock, and issued approximately 264 million shares of its convertible preferred
stock in exchange for outstanding promissory notes having a principal balance of
approximately $7.5 million and related accrued interest payable of
$525,000.   During the three months ended March 31, 2008, the
Company (i) received approximately $2.2 million from loans from new and
existing investors, (ii) entered into agreements with holders of certain notes
payable pursuant to which the Company issued approximately 243.9 million shares
of Company common stock in consideration for conversion of all convertible notes
payable of  $13.2 million together with related accrued interest
of approximately $1.7 million and the surrender of outstanding warrants to
purchase approximately 38.6 million shares of Company common stock, (iii)
entered into agreements with related party and non-related party creditors
providing for issuance of  approximately 15.9 million shares of
Company common stock as payment for accounts payable or accrued amounts owed of
$754,000, and (iv) entered into agreements with holders of warrants to purchase
Company common stock pursuant to which the Company issued 81.9 million shares of
its common stock in exchange for the cancellation of warrants to purchase
approximately 124.2 million shares.





As a
result of our new production technology beginning to come online, and to reduce
plant operating costs and use of cash during the ramp-up period, we decided to
direct most production to the new technology equipment and accordingly reduced
operations of prior technology production equipment.  In the near
term, production volumes and revenues will decrease as the new technology comes
on line and then are expected to increase as throughput increases as a
percentage of capacity. In connection with reducing prior technology production
in mid-November 2008, we terminated approximately 85 employees at our Riverbank
plant, thus reducing our workforce to approximately 35 employees. As production
volume increases over the next several months, similarly, our workforce is
expected to increase.




At
December 31, 2008, the Company has cash and cash equivalents of approximately
$1.6 million and a working capital deficit of $3.3 million, compared to cash and
cash equivalents of approximately $101,000 and a working capital deficit of
$18.6 million at December 31, 2007.  At December 31, 2008, the Company
had total stockholders’ equity of $4.6 million as compared with total
stockholders’ deficit of $11.8 million at December 31, 2007.  While
the Company’s financial position and condition is much improved, at December 31,
2008, the Company does not have sufficient cash to meets it needs for the next
twelve months.  There is no assurance that continued financing
proceeds will be obtained in sufficient amounts necessary to meet the Company's
needs. In view of these matters, continuation as a going concern is dependent
upon the Company's ability to meet its financing requirements, raise additional
capital, and the future success of its operations.  The accompanying
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classifications of liabilities that may result from the possible inability
of the Company to continue as a going concern.





Summary of Significant
Accounting Policies - Significant accounting policies used in preparation
of the Company’s financial statements are summarized below.





Use of estimates in the
preparation of financial statements - Preparation of financial statements
in conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect


F-6


Cash and cash
equivalents - The Company considers deposits that can be redeemed on
demand and investments that have original maturities of less than three months
when purchased to be cash equivalents.





Accounts Receivable and
allowance for doubtful accounts - The Company’s accounts receivable are
due from companies in the packaging, manufacturing and recycling
industries.  Payments from customers are due within 30 days of the
invoice if a satisfactory credit review has been completed by us.  If
not satisfactory, payment is required in advance of shipment. Accounts
receivable are stated at amounts due from customers net of an allowance for
doubtful accounts.  Accounts outstanding beyond payment terms are
considered past due.  The Company determines its allowance by
considering a number of factors, including the length of time accounts
receivable are past due, the Company’s previous loss history, the customer’s
current ability to pay its obligations, and the condition of the general economy
and industry as a whole.  The Company writes off accounts receivable
when they become uncollectible, and payments subsequently collected on such
accounts are credited to the allowance for doubtful accounts.





Inventories–Inventories
are recorded at lower of cost, determined on a first-in-first out basis, or
market.




Property and
equipment – Property and equipment are recorded at cost less accumulated
depreciation.  Expenditures for major additions and improvements are
capitalized, and minor maintenance, repairs and replacements are charged to
expense as incurred.  When property and equipment are retired or
otherwise disposed of, the cost and accumulated depreciation are removed from
the accounts and any resulting gain or loss is included in the results of
operations.  Depreciation is provided using the straight-line method
over the estimated useful lives of the respective assets, which are three years
for furniture and equipment, and seven years for the recycling
plant.




Impairment
of  long-lived assets – Management evaluates the recoverability
of the Company’s long-lived assets in accordance with SFAS No. 144,
“Accounting for the Impairment or Disposal of Long-lived Assets,” which
generally requires the assessment of these assets for recoverability when events
or circumstances indicate a potential impairment exists. Events and
circumstances considered by the Company in determining whether the carrying
value of long-lived assets may not be recoverable include, but are not limited
to: significant changes in performance relative to expected operating results,
significant changes in the use of the assets, significant negative industry or
economic trends, a significant decline in the Company’s stock price for a
sustained period of time, and changes in the Company’s business strategy. In
determining if impairment exists, the Company estimates the undiscounted cash
flows to be generated from the use and ultimate disposition of these assets. If
impairment is indicated based on a comparison of the assets’ carrying values and
the undiscounted cash flows, the impairment loss is measured as the amount by
which the carrying amount of the assets exceeds the fair market value of the
assets.




Deferred debt issue
costs – The Company capitalizes direct incremental costs paid to third
parties incurred in connection with borrowings.  These costs are
amortized as an adjustment to interest expense over the life of the
borrowing.





Debt discount – The
Company records, as applicable, fees paid to lenders, the fair value of warrants
issued with debt securities, value of beneficial conversion features of
convertible debt, or fair value of derivatives embedded in convertible debt
instruments relating to debt securities, as a debt discount, which is amortized
as an adjustment to interest expense over the borrowing term.




Contingencies -
Certain conditions may exist as of the date financial statements are issued,
which may result in a loss to the Company, but which will only be resolved when
one or more future events occur or fail to occur. Company management and its
legal counsel assess such contingent liabilities, and such assessment inherently
involves an exercise of judgment. In assessing loss contingencies related to
legal proceedings that are pending against the Company or unasserted claims that
may result in such proceedings, the Company's legal counsel evaluates the
perceived merits of any legal proceedings or unasserted claims as well as the
perceived merits of the amount of relief sought or expected to be sought
therein. If the assessment of a contingency indicates that it is probable that a
liability has been incurred and the amount of the liability can be reasonably
estimated, then the estimated liability would be accrued in the Company's
financial statements. If the assessment indicates that a potentially material
loss contingency is not probable but is reasonably possible, or is probable but
cannot be reasonably estimated, then the nature of the contingent liability,
together with an estimate of the range of possible loss if determinable would be
disclosed.




Fair value of financial
instruments - The Company measures its financial assets and liabilities
in accordance with generally accepted accounting principles. For certain of the
Company's financial instruments, including cash and cash equivalents,
receivables, accounts payable and accrued liabilities, the carrying amounts
approximate fair value due to their short maturities. Amounts recorded for notes
payable, net of discount, also approximate fair value because current interest
rates offered to the Company for debt of similar maturities are substantially
the same.





Accounting for
Derivatives – The Company evaluates its convertible debt, options,
warrants or other contracts to determine if those contracts or embedded
components of those contracts qualify as derivatives to be separately accounted
for under Statement of Financial Accounting Standards 133 “Accounting for Derivative
Instruments and Hedging Activities” and related interpretations including
EITF 00-19 “Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company’s Own Stock”.   The result of this accounting
treatment is that under certain circumstances the fair value of the derivative
is marked-to-market each balance sheet date and recorded as a
liability.  In the event that the fair value is recorded as a
liability, the change in fair value is recorded in the statement of operations
as other income or expense.  Upon conversion or exercise of a
derivative instrument, the instrument is marked to fair value at the conversion
date and then that fair value is reclassified to equity. Equity instruments that
are initially classified as equity that become subject to reclassification under
SFAS 133 are reclassified to liability at the fair value of the instrument on
the reclassification date.





Revenue recognition -
The Company recognizes revenue when there is persuasive evidence of an
arrangement, the product has been delivered to the customer, the sales price is
fixed or determinable, and collectability is reasonably assured. The Company
recognizes revenues from sales of recycled products upon shipment to
customers.  Amounts received in advance of when products are delivered
are recorded as liabilities in the accompanying balance
sheet.  Research or other types of grants from governmental agencies
or private organizations are recognized as revenues if evidence of an
arrangement exists, the amounts are determinable and collectability is
reasonably assured with no further obligations or contingencies
remaining.





Incentive
grants from the California Department of Conservation recognized as revenues
during 2008 and 2007 were approximately $368,000 and $117,000,
respectively.





Cost of goods sold –
Cost of goods sold includes the cost of raw materials processed, and in 2007
also includes $204,000 of write-downs for scrap and waste product.





Income taxes - The
Company accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes,”
which requires recognition of deferred tax assets and liabilities for expected
future tax consequences of events that have been included  in financial
statements or tax returns. Under this method, deferred income taxes are
recognized for tax consequences in future years of differences between the tax
bases of assets and liabilities and their financial reporting amounts at each
period end based on enacted tax laws and statutory tax rates applicable to the
periods in which the differences are expected to affect taxable income.
Valuation allowances are established, when necessary, to reduce deferred tax
assets to amounts expected to be realized.  The Company continues to
provide a full valuation allowance to reduce its net deferred tax asset to zero,
inasmuch as Company management has not determined that realization of deferred
tax assets is more likely than not. The provision for income taxes represents
taxes payable for the period and change during the period in net deferred tax
assets and liabilities.





The
Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an
interpretation of FASB Statement No. 109” (“FIN 48”) on January 1, 2007.
The Company has identified its federal income tax return and state income tax
return in California as “major” tax jurisdictions, as defined. The periods
subject to examination for our federal and California state income tax returns
are the tax years ended in 2000 and thereafter, since the Company has net
operating loss carryforwards for tax years starting in 2000. The Company
believes its income tax filing positions and deductions will be sustained on
audit and does not anticipate any adjustments that would result in a material
change to its financial position. Therefore, no reserves for uncertain income
tax positions have been recorded pursuant to FIN 48, and no cumulative effect
adjustment was recorded related to the adoption of FIN 48. The Company’s policy
for recording interest and penalties associated with audits, if
any,  is to record such items as a component of income (loss) before
taxes. If applicable, penalties and interest paid are recorded in interest and
other expense and interest received is recorded in interest income in the
statement of operations.




Research and development
cost – Research and development represent costs incurred in connection
with the Company’s development of recycling processes, and such costs are
expensed as incurred and included in technology development expenses. In 2006,
the Company was developing its recycling processes and plant operations and
technology development expense, which approximated $2.0 million, was considered
research and development expense as the Company had not commenced operations
other than at a testing level.  In 2008 and 2007, research and development
expense approximated $36,000 and $121,000, respectively.





Shipping costs –
Shipping cost related to purchased inventory is capitalized as part of inventory
and ultimately recognized as cost of goods sold upon sale.  Cost
incurred to ship products to customers is also recorded as cost of goods
sold.





Stock-based
compensation – The Company accounts for stock-based compensation in
accordance with Statement of
Financial Accounting Standard (“SFAS”) No. 123R, Accounting for Stock-Based
Compensation(“FAS 123R”). FAS 123R sets forth the accounting for
share-based payment transactions in which an enterprise receives employee
services in exchange for (a) equity instruments of the enterprise or (b)
liabilities that are based on the fair value of the enterprise's equity
instruments or that may be settled by the issuance of such equity instruments.
The statement requires that such transactions be accounted for using a
fair-value-based method, which requires recording expense over the requisite
service period for the fair value of options or warrants granted.





Basic and diluted net loss
attributable to holders of common stock per common share - Basic net loss
attributable to holders of common stock per common share is computed by dividing
net loss attributable to holders of common stock, which is the net loss less the
constructive dividend relating to the beneficial conversion feature related to
Series A and Series B-1 Convertible Preferred Stock, by the weighted-average
number of common shares outstanding during the period. Diluted net loss per
common share is determined using the weighted-average number of common shares
outstanding during the periods, adjusted for the dilutive effect of common stock
equivalents, consisting of shares that might be issued upon exercise of common
stock options, warrants or convertible promissory notes. In periods where losses
are reported, the weighted-average number of common shares outstanding excludes
common stock equivalents, because their inclusion would be
anti-dilutive.  Computations of net loss per share for the year ended
December 31, 2008, exclude 347,056,717 shares issuable upon exercise of
outstanding and issuable warrants to purchase common stock, 497,582,173 shares
issuable upon conversion of outstanding convertible notes payable and
481,473,651 shares issuable upon conversion of outstanding convertible preferred
stock. Computations of net loss per share for year ended December 31, 2007,
exclude 135,651,501 shares relating to common stock issuable upon conversion of
convertible notes payable, and 182,697,176 shares issuable upon exercise of
outstanding and issuable warrants to purchase common stock. These common stock
equivalents could have the effect of decreasing diluted net income per share in
future periods.




Reclassifications –
Certain amounts in the 2007 financial statements have been reclassified to
conform to 2008 presentations.





Recent accounting
pronouncements - In December 2006, the FASB issued FASB Staff Position
No. EITF 00-19-2 “Accounting for Registration
Payment Arrangements” (“FSP EITF 00-19-2”), which addresses an issuer’s
accounting and disclosures relating to registration payment arrangements. In
accordance with FSP EITF 00-19-2, registration payment arrangements are
accounted for as an instrument separate and apart from the related securities
and will be accounted for in accordance with Statement of Financial Accounting
Standards No. 5 “Accounting for Contingencies,” accruing a liability if payment
is probable and the amount can be reasonably estimated. Unless the Company
enters into agreements providing for payments relating to registration
arrangements, this pronouncement will have no effect on the Company’s results of
operation, financial position or liquidity.




Effective
January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), for
financial assets and liabilities. Adoption of SFAS 157 did not have a material
impact on the Company’s results of operations, financial position or liquidity.
This standard defines fair value, provides guidance for measuring fair value and
requires certain disclosures. This standard does not require any new fair value
measurements, but rather applies to all other accounting pronouncements that
require or permit fair value measurements. This standard does not apply
measurements related to share-based payments. SFAS 157 discusses valuation
techniques, such as the market approach (comparable market prices), the income
approach (present value of future income or cash flow), and the cost approach
(cost to replace the service capacity of an asset or replacement cost). The
statement utilizes a fair value hierarchy that prioritizes the inputs to
valuation techniques used to measure fair value into three broad levels. The
following is a brief description of those three levels:




Level
1: Observable inputs such as quoted prices (unadjusted) in active
markets for identical assets or liabilities.




Level
2: Inputs other than quoted prices that are observable for the asset or
liability, either directly or indirectly. These include quoted prices for
similar assets or liabilities in active markets and quoted prices for identical
or similar assets or liabilities in markets that are not active.




Level
3: Unobservable inputs that reflect the reporting entity’s own
assumptions.




The
Company’s financial assets subject to fair value measurements at December 31,
2008 are comprised of cash and cash equivalents of approximately $1.6 million
all of which are valued using Level 1 observable inputs.




In
February 2008, the Financial Accounting Standards Board, or FASB, issued FASB
Staff Position No. FAS 157-2, “Effective Date of FASB Statement No. 157”,
which provides a one year deferral of the effective date of SFAS 157 for
non-financial assets and non-financial liabilities, except those that are
recognized or disclosed in the financial statements at fair value at least
annually. Therefore, the Company adopted the provisions of SFAS 157 with respect
to its financial assets and liabilities only.





In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (“SFAS 159”), which is effective for
fiscal years beginning after November 15, 2007.  Adoption of SFAS 159
did not have a material impact on the Company’s results of operations, financial
position or liquidity.





In June
2007, the Emerging Issues Task Force of the FASB issued EITF Issue No. 07-3,
Accounting for Nonrefundable
Advance Payments for Goods or Services to be Used in Future Research and
Development Activities, (“EITF 07-3”) which is effective for fiscal years
beginning after December 15, 2007. EITF 07-3 requires that nonrefundable advance
payments for future research and development activities be deferred and
capitalized. Such amounts will be recognized as an expense as goods are
delivered or services are performed. Adoption of EITF 07-3 did not have a
material impact on the Company’s results of operations or financial
position.




In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations”(“SFAS 141(R)”), which replaces SFAS No. 141. SFAS No. 141(R) establishes
principles and requirements for how an acquirer recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
any non-controlling interest in the acquiree and the goodwill acquired. The
Statement also establishes disclosure requirements which will enable users to
evaluate the nature and financial effects of the business combination. SFAS
141(R) is effective for fiscal years beginning after December 15, 2008. The
adoption of SFAS 141(R) will have an impact on accounting for future business
combinations once adopted.




In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements – an amendment of Accounting Research Bulletin
No. 51”(“SFAS 160”), which establishes accounting and reporting
standards for ownership interests in subsidiaries held by parties other than the
parent, the amount of consolidated net income attributable to the parent and to
the noncontrolling interest, changes in a parent’s ownership interest and the
valuation of retained non-controlling equity investments when a subsidiary is
deconsolidated. The Statement also establishes reporting requirements that
provide sufficient disclosures that clearly identify and distinguish between the
interests of the parent and the interests of the non-controlling owners. SFAS
160 is effective for fiscal years beginning after December 15, 2008. In the
absence of possible future investments, application of SFAS 160 will have no
effect on the Company’s financial statements.




In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities – an amendment of SFAS No. 133.
This statement changes the disclosure requirements for derivative instruments
and hedging activities. SFAS No. 161 requires enhanced disclosures about
(a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for under SFAS
No. 133, Accounting for
Derivative Instruments and Hedging Activities, and its related
interpretations, and (c) how derivative instruments and related hedged
items affect an entity’s financial position, financial performance, and cash
flows. SFAS No. 161 is effective for the Company’s interim period beginning
January 1, 2009. The Company does not use derivative financial instruments
nor does it engage in hedging activities.  The Company is currently
evaluating the impact of implementation of SFAS No. 161 on its financial
position, results of operations and cash flows.




In June
2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles. This statement identifies the sources of generally
accepted accounting principles and provides a framework, or hierarchy, for
selecting the principles to be used in preparing U.S. GAAP financial statements
for nongovernmental entities.  This statement makes the GAAP hierarchy
explicitly and directly applicable to preparers of financial
statements.  The hierarchy of authoritative accounting guidance is not
expected to change current practice but is expected to facilitate the FASB‘s
plan to designate as authoritative its forthcoming codification of accounting
standards.  This statement is effective 60 days following the SEC’s
approval of the PCAOB’s related amendments to remove the GAAP hierarchy from its
auditing standards.




In June
2008, the Emerging Issues Task Force of the FASB issued EITF Issue No. 08-4,
Transition Guidance for
Conforming Changes to Issue No. 98-05(“EITF 08-4”), which is effective
for fiscal years ending after December 15, 2008, with earlier application
permitted.  EITF 08-4 provides for, among other things, revisions to
certain provisions of EITF 98-05, including nullification of guidance under EITF
98-05 that upon conversion, unamortized discounts for instruments with
beneficial conversion features should be included in the carrying value of the
convertible security that is transferred to equity at the date of
conversion.  This nullification was made to update guidance to
acknowledge the issuance of EITF Issue No. 00-27, which revised accounting
guidance to require immediate recognition of interest expense for the
unamortized discount.  In accordance with EITF 08-4 transition
guidance, the Company
has retrospectively applied the accounting guidance of EITF
00-27.  During 2008, certain convertible promissory notes payable were
exchanged for shares of Company common stock, and as a result of adoption of
EITF 00-27 accounting guidance the remaining unamortized debt discount of
approximately $2.2 million was recognized as interest expense.  There
was no cumulative effect for periods prior to 2008.




In June
2008, the Emerging Issues Task Force of the FASB issued EITF Issue No. 07-5,
Determining Whether an
Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock(“EITF 07-5”), which is effective for fiscal years ending after December
15, 2008, with earlier application not permitted by entities that has previously
adopted an alternative accounting policy.  The adoption of EITF 07-5’s
requirements will affect accounting for convertible instruments and warrants
with provisions that protect holders from declines in the stock price
(“round-down” provisions).  Warrants with such provisions will no
longer be recorded in equity.  EITF 07-5 guidance is to be applied to
outstanding instruments as of the beginning of the fiscal year in which the
Issue is applied.  The cumulative effect of the change in accounting
principle shall be recognized as an adjustment to the opening balance of
retained earnings (or other appropriate components of equity) for that fiscal
year, presented separately.  The cumulative-effect adjustment is the
difference between the amounts recognized in the statement of financial position
before initial application of this Issue and the amounts recognized in the
statement of financial position at initial application of this
Issue.  The amounts recognized in the statement of financial position
as a result of the initial application of this Issue shall be determined based
on the amounts that would have been recognized if the guidance in this Issue had
been applied from the issuance date of the instrument.  The Company is
in the process of determining the financial reporting (non-cash) effect of
initial adoption of this accounting requirement for future financial statements,
and does not expect adoption to have a material effect on its financial
position, results of operations or cash flows.





Note
2.                      Inventories





Inventories
at December 31 consist of the following (in thousands):







2008
              
              
              2007Raw
      materials
              
              $
              13
              
              
              $
              274Finished
      goods
              
              
              35
              
              
              
              201Total
              
              $
              48
              
              
              $
              475


Note
3.  Property and Equipment





Property
and equipment at December 31, consist of the following (in
thousands):





2008
              
              
              2007Furniture
      and equipment
              
              $
              262
              
              
              $
              265Reclycling
      plant and construction in progress
              
              
              12,063
              
              
              
              9,390Total
      property and equipment
              
              
              12,305
              
              
              
              9,655Less
      accumulated depreciation
              
              
              (3,201
              )
              
              
              (1,791
              )$
              9,104
              
              
              $
              7,864




During
2008, the Company ceased operating certain prior technology production assets,
and in connection with a review for asset impairment, recorded impairment
expense of $252,000, which is included in plant operations and technology
development expense, representing the net book value of assets held for
disposal, net of estimated net sales proceeds.  During 2007, the
Company sold certain excess equipment with a net book value of approximately
$170,000 and recognized a loss of approximately $96,000, which is included in
general and administrative expense.  Depreciation expense was
$1,438,976 and $1,134,460 in 2008 and 2007, respectively.




Note 4.Concentrations and Major
Customers





Technology License -
The Company’s business is reliant on its licensing of technology from
Honeywell.  Pursuant to terms of a license agreement entered into by
the Company and Honeywell, as amended, the Company obtained an exclusive,
nontransferable, worldwide license rights for the life of the underlying patent
to practice the methods and to make, use, and sell the products and/or services
and to certain sublicense rights, which are covered by the proprietary rights,
limited to the field of use of separating and recovering motor oil from high
density polyethylene plastic. Under this agreement, the Company is required to
pay royalties at a rate of $0.005 per pound of recycled plastics sold, with
minimum annual royalties of $100,000 for 2007, $200,000 for 2008 and $300,000
for 2009 and for years thereafter.  Honeywell may terminate this
agreement in the event of, among other things, the nationalization of the
industry which encompasses any products or services, any suspension of payments
under the terms of the agreement by government regulation, a substantial change
in ownership of the Company (whether resulting from merger, acquisition,
consolidation or otherwise), another company or person acquiring control of
the Company, or the existence of a state of war between the United States and
any country where the Company has a license to manufacture products or provide
services.





Cash in excess of federally
insuredlimits - Cash and
cash equivalents are maintained at financial institutions and, at times,
balances may exceed federally insured limits.  The Company has never
experienced any losses related to these balances.  Such amounts on
deposit in excess of federally insured limits at December 31, 2008 approximated
$870,000.





Major Customers -
During the years ended December  31, 2008 and 2007, the Company had
revenues of over 10% of total revenue from individual customers and related
accounts receivable over 10% of total accounts receivable at December 31, 2008
and 2007 as follows (“*” means < 10%):




Revenues
              
              
              Accounts Receivable2008
              
              
              2007
              
              
              2008Customer
      A
              
              
              26
              %
              
              
              *
              
              
              
              23
              %Customer
      B
              
              
              21
              %
              
              
              24
              %
              
              
              *Customer
      C
              
              
              16
              %
              
              
              15
              %
              
              
              *Customer
      D
              
              
              11
              %
              
              
              *
              
              
              
              *Customer
      E
              
              
              *
              
              
              
              40
              %
              
              
              *Customer
      F
              
              
              *
              
              
              
              10
              %
              
              
              *Customer
      G
              
              
              *
              
              
              
              *
              
              
              
              63
              %


Customer
G is the California Department of Conservation, which pursuant to terms of
incentive grants are billed quarterly and accounts for the relatively large
percentage of accounts receivables as compared to revenues.  Accounts
receivable are current as to payment terms.





Note
5.  Notes Payable and Convertible Notes Payable





Pursuant
to terms of a Business Loan Agreement, Security Agreements and $2 million
Promissory Note with the California Integrated Waste Management Board (“CIWMB”),
in 2005 the Company received cash into escrow after deduction of $10,000 loan
fees paid to CIWMB. The loan fee was recorded as a debt discount, which is
amortized over the loan term.  The promissory note bears interest at 4.25%
per annum, with interest only monthly payments during the first year, and then
principal and interest monthly payments of approximately $22,500 starting in
July 2006 until fully paid in May 2015. The promissory note is collateralized by
equipment purchased for the recycling plant, a secondary security interest in
all other machinery and equipment and other Company assets, and guaranteed by
the Company's then chief executive officer.  Balances as of December
31consis of the following (in thousands):




Unamortized
              
              
              Notes,
      netNotes
              
              
              debt
      discount
              
              
              of
      discountDecember
      31, 2008Current
      portion
              
              $
              209
              
              
              $
              -
              
              
              $
              209Non-current
      portion
              
              
              1,305
              
              
              
              (6
              )
              
              
              1,299Total
              
              $
              1,514
              
              
              $
              (6
              )
              
              $
              1,508December
      31, 2007Current
      portion
              
              $
              200
              
              
              $
              -
              
              
              $
              200Non-current
      portion
              
              
              1,514
              
              
              
              (7
              )
              
              
              1,507Total
              
              $
              1,714
              
              
              $
              (7
              )
              
              $
              1,707





Convertible
notes payable and related accounts at December 31, 2008, consist of the
following (in thousands):




Convertible
              
              
              Unamortized
              
              
              Notes,
      net
              
              
              AccruedNotes
              
              
              debt
      discount
              
              
              of
      discount
              
              
              interestConvertible
      promissory notes, due March 2009Due
      to related parties
              
              $
              2,626
              
              
              $
              (1,171
              )
              
              $
              1,455
              
              
              $
              124Due
      to others
              
              
              1,389
              
              
              
              (597
              )
              
              
              792
              
              
              
              64Subtotal
              
              
              4,015
              
              
              
              (1,768
              )
              
              
              2,247
              
              
              
              188Convertible
      promissory notes, due December 2011Due
      to related parties
              
              
              3,120
              
              
              
              (3,079
              )
              
              
              41
              
              
              
              10Due
      to others
              
              
              329
              
              
              
              (324
              )
              
              
              5
              
              
              
              1Subtotal
              
              
              3,449
              
              
              
              (3,403
              )
              
              
              46
              
              
              
              11Total
              
              $
              7,464
              
              
              $
              (5,171
              )
              
              $
              2,293
              
              
              $
              199








Notes
payable and related accounts at December 31, 2007, consist of the following (in
thousands):





Convertible
              
              
              Unamortized
              
              
              Notes,
      net
              
              
              AccruedNotes
              
              
              debt
      discount
              
              
              of
      discount
              
              
              interestSubordinated
      convertible notes
              
              $
              292
              
              
              $
              -
              
              
              $
              292
              
              
              $
              58Director
      notes
              
              
              2,351
              
              
              
              -
              
              
              
              2,351
              
              
              
              127Short-term
      notes
              
              
              2,162
              
              
              
              (1,100
              )
              
              
              1,062
              
              
              
              39Private
      placement convertible notes
              
              
              12,934
              
              
              
              (3,314
              )
              
              
              9,620
              
              
              
              1,423$
              17,739
              
              
              $
              (4,414
              )
              
              $
              13,325
              
              
              $
              1,647Due
      to related parties
              
              $
              9,271
              
              
              $
              (1,856
              )
              
              $
              7,415
              
              
              $
              846Due
      to others
              
              
              8,468
              
              
              
              (2,558
              )
              
              
              5,910
              
              
              
              801Total
              
              $
              17,739
              
              
              $
              (4,414
              )
              
              $
              13,325
              
              
              $
              1,647




At
December 31, 2008, aggregate maturities of notes payable were as follows (in
thousands):




ConvertibleYear
      ending December 31,
              
              CIWMB
              
              
              Notes
              
              
              Total2009
              
              $
              209
              
              
              $
              4,015
              
              
              $
              4,2242010
              
              
              219
              
              
              
              -
              
              
              
              2192011
              
              
              229
              
              
              
              3,449
              
              
              
              3,6782012
              
              
              240
              
              
              
              -
              
              
              
              2402013
              
              
              249
              
              
              
              -
              
              
              
              249Thereafter
              
              
              368
              
              
              
              -
              
              
              
              368$
              1,514
              
              
              $
              7,464
              
              
              $
              8,978




2008 Issuance of Common
Stock in exchange for Private Placement and Subordinated
Convertible Notes Payable and Warrants – During 2008, the Company
issued approximately 243.9 million shares of its common stock in exchange for
full satisfaction of all then outstanding convertible notes payable, which
approximated $13.2 million and related accrued interest of approximately $1.7
million, and the return of outstanding warrants to purchase approximately 38.6
million shares of Company common stock having an exercise price of $0.06 per
share and expiring in April 2015, which such warrants were acquired when the
notes were issued.  The total number of shares issued was in excess of
what would have been received had the notes been converted according to original
terms.  The Company has accounted for this transaction
pursuant to Statement of Financial Accounting Standards No. 84 “Induced Conversions of Convertible
Debt—an amendment of APB Opinion No. 26 “, and accordingly, the
excess of fair value of consideration issued by the Company over the fair value
of what would have been received has been recorded as a loss of approximately
$2.8 million.  The remaining unamortized debt discount of
approximately $2.2 million was written off and recognized as interest expense
and the remaining unamortized debt issue costs of $198,000 were written off
with the offset decreasing additional paid-in capital.





2008 Issuance of Convertible
Preferred Stock in exchangeforDirector Notes and
Short-term Notes - During 2008, holders of outstanding Director Notes and
Short-term notes, which had an outstanding principal amount of approximately
$2.9 million and $4.6 million and related accrued interest payable of $318,000
and $206,000, respectively, exchanged all such notes and accrued interest for
152,843,413 shares of the Company’s Series A Convertible Preferred Stock and
111,240,040 shares of the Company’s Series B-1 Convertible Preferred
Stock.  The unamortized balance of deferred debt discount relating to
a portion of the notes was $201,000 and was written off upon the transaction
with the offset decreasing additional paid in-capital.





Pursuant
to terms of an Amended and Restated Subordination and Intercreditor Agreement
(the “Intercreditor Agreement”) signed by purchasers of Convertible Notes due
December 2011 and certain purchasers of Convertible Notes due March 2009,
approximately $2.6 million of Convertible Notes due March 2009 are subordinate
to $3.0 million of Convertible Notes due December 2011 held by certain investors
(the “Senior Lenders”) (the “Senior Debt”); provided that so long as at the time
of and after giving effect to any such payment of principal or interest due on
subordinated debt, no Event of Default (as defined) has occurred under the
amended and restated notes, security agreements and other documents evidencing
the Convertible Notes due December 2011, or would occur as a result thereof, the
Company may make regularly scheduled payments of principal and interest on such
subordinated debt.





2008 Issuance of Convertible
Promissory Notes, due March 2009 – During 2008, the Company received cash
of approximately $3.9 million and a promissory note with related accrued
interest totaling approximately $101,000 and in exchange issued convertible
notes payable due March 31, 2009 (the “Convertible Notes due March 2009”) of
approximately $4.0 million and warrants to purchase approximately 134 million
shares of Company common stock at a per share price of $0.015 that expire in
April 2015.  The Convertible Notes due March 2009 bear interest at
15%, and are convertible into shares of Company common stock, and upon written
election at the discretion of holders of 60% or more of the aggregate principal
amount of Convertible Notes due March 2009 then outstanding, the entire
principal amount of such notes, together with all accrued interest, which shall
be computed as if such notes were held until March 31, 2009, regardless of
whether converted prior to that date, shall be converted.  If the
Company has raised $1 million in new equity, the conversion price would be the
lesser of 80% of the new equity price or $0.015 per share.  If such
next equity financing has not occurred, then the conversion securities shall
consist of shares of a newly created series of Series C Convertible Preferred
Stock of the Company having rights, preferences and privileges substantially
similar to those of the Company’s Series B Stock, except that the liquidation
preference shall be senior to the Series B Stock and the Company’s Series A
Convertible Preferred Stock, at a price per share equal to $0.015 (subject to
appropriate adjustment for all stock splits, subdivisions, combination,
recapitalizations and the like) until April 2015.  The Company has
pledged as collateral pursuant to terms of a Security Agreement relating to the
Convertible Notes due March 2009, as amended and restated, substantially all of
its assets, subject only to a security interest granted to
CIWMB.  Debt discount relating to these Convertible Notes approximated
$4.0 million, of which approximately $2.2 million was amortized to interest
expense during 2008, with the remainder to be amortized in 2009.  The
fair value of warrants was computed using a Black-Scholes option pricing model
with the following assumptions:  expected term of 6.5 years
(contractual term), volatility of 156% (based on historical volatility), zero
dividends and interest rate of approximately 3.1%. In connection with a
subsequent financing in 2008, upon written election of holders of more than 65%
of the aggregate principal amount of Convertible Notes due March 2009 then
outstanding, the Convertible Notes due March 2009 are subordinate to Convertible
Notes due December 2011.





2008 Issuance of Convertible
Promissory Notes, due December 2011- Additionally, in 2008, the Company
received cash of approximately $3.4 million and an amount due to an officer for
deferred compensation of $50,000 and in exchange issued convertible notes
payable due in December 2011(the “Convertible Notes due December 2011”) of
approximately $3.45 million and warrants to purchase approximately 115 million
shares of Company common stock at a per share price of $0.015 that expire in
April 2015.  The Convertible Notes bear interest at
8%.   The Convertible Notes due December 2011 are convertible
into shares of Company Series C Convertible Preferred stock, and upon written
election at the discretion of holders of 70% or more of the aggregate principal
amount of Convertible Notes due December 2011 then outstanding, the entire
principal amount of such notes, together with all accrued interest shall be
converted at a price per share equal to $0.015 (subject to appropriate
adjustment for all stock splits, subdivisions, combination, recapitalizations
and the like).  The Company has pledged as collateral pursuant to
terms of a Security Agreement relating to the Convertible Notes, as amended and
restated, substantially all of its assets, subject only to a security interest
granted to CIWMB.  Debt discount relating to these Convertible Notes
approximated $3.4 million, of which approximately $46,000 was amortized to
interest expense during 2008, with the remainder to be amortized approximately
$1.2 million in each of 2009 and 2010 and $1.1 million in 2011.  The
fair value of warrants was computed using a Black-Scholes option pricing model
with the following assumptions:  expected term of 6.3 years
(contractual term), volatility of 151% (based on historical volatility), zero
dividends and interest rate of approximately 1.5%.  Pursuant to terms
of an Amended and Restated Subordination and Intercreditor Agreement (the
“Intercreditor Agreement”) signed by purchasers of Convertible Notes due
December 2011 and certain purchasers of Convertible Notes due March 2009, the
Convertible Notes due March 2009 are subordinate to $3.0 million of Convertible
Notes due December 2011 held by certain investors (the “Senior Lenders”) (the
“Senior Debt”); provided that so long as at the time of and after giving effect
to any such payment of principal or interest due on subordinated debt, no Event
of Default (as defined) has occurred under the amended and restated notes,
security agreements and other documents evidencing the Convertible Notes due
December 2011, or would occur as a result thereof, the Company may make
regularly scheduled payments of principal and interest on such subordinated
debt.





2008 Issuances of Other
Notes Payable – During 2008, the Company received $300,000 cash pursuant
to terms of a short-term $300,000 promissory note bearing interest at 15%, which
was repaid in full.  Additionally, during 2008, the Company’s Chief
Executive Officer loaned the Company $270,000 pursuant to terms of short-term
notes payable bearing interest at 15%, of which $175,000 was
repaid.  The remaining $95,000 and related accrued interest of
approximately $6,000 were exchanged for convertible notes payable, which were
subsequently converted into shares of the Company’s common stock.





2007 Issuances of Private
Placement Notes and Warrants- During 2007, the Company received $5
million pursuant to investment terms substantially similar to the PPM (the
“Additional Investment”) and issued $5 million Private Placement Notes and
Private Placement Warrants to purchase 15,000,000 shares of common
stock.  In connection with the Additional Investment, the placement
agent received cash fees of approximately $100,000 and received warrants, with a
cashless exercise provision, to purchase 382,429 shares of restricted common
stock of the Company at a per share price of $0.06 exercisable for 10
years.  Pursuant to rights and terms of the Additional Investment
purchase agreement, the holder of $2 million of notes designated one person to
become a member of the Company’s Board of Directors, which such person was
appointed in 2007.  Additionally, in 2007, the Company issued three
PPM Units, comprised of $75,000 of Private Placement Notes and 225,000 Private
Placement Warrants in exchange for accrued liabilities, which such notes were
immediately converted into 769,231 shares of Company common stock in accordance
with terms of the notes.  During 2007, debt discount, comprised of
warrant and beneficial conversion feature values, of approximately $5 million
was recorded.  The fair value of warrants was computed using a
Black-Scholes option pricing model with the following assumptions: expected term
of 8 years (based on the contractual term), volatility of 180% (based on
historical volatility), zero dividends and interest rate of
4.6%.  During 2008 and 2007 approximately $2.6 million and $2.4
million, respectively, of the discount was amortized to interest
expense.





2007 Issuances
of  Director Notes due in 90 days – During 2007, the
Company received cash proceeds of approximately $2.7 million from various
members of the Company’s then Board of Directors (the “Director
Notes”).  In accordance with the Director Notes, each lender received
a promissory note with an interest rate of 15% per annum (the
“Note”).  All or any portion of the Note, any accrued interest thereon
and all other sums due under the Note, was due and payable on demand within 90
days of the Note.  In connection with these notes, lenders received
common stock purchase warrants to purchase 22,657,000 shares of Company common
stock with an exercise price of $0.06 per share that expire in April
2015.  The shares underlying the warrants are subject to piggy back
registration rights.  The exercise price of the warrants is subject to
anti-dilution downward adjustments in the event the Company sells common stock
at a price below the exercise price.  Debt discount relating to the
value of warrants issued of approximately $2.7 million was recorded and
amortized to interest expense during 2007.   The fair value of
warrants was computed using a Black-Scholes option pricing model with the
following assumptions: expected term of 7.8 years (based on the contractual
term), volatility of approximately 180% (based on historical volatility), zero
dividends and interest rate of approximately 4.6%.





2007 Issuances of Short-term
Notes due in 180 days- During 2007, the Company received cash proceeds
of approximately $2.2 million from new and existing investors and issued to
each lender a promissory note with an interest rate of 15% per annum, due and
payable on demand within 180 days (the “Short-Term Notes”), and warrants to
purchase approximately 15 million shares of Company common stock with an
exercise price of $0.06 per share that expire in April 2015.  During
2008, the Company received cash of approximately $3.1 million and issued to each
lender Short-Term Notes, and issued to certain lenders warrants to purchase
approximately 9.2 million shares of Company common stock with an exercise price
of $0.06 per share that expire in April 2015.   The shares
underlying the warrants are subject to piggy back registration
rights.  The exercise price of the warrants is subject to
anti-dilution downward adjustments in the event the Company sells common stock
at a price below the exercise price.  Debt discount relating to the
value of warrants issued in 2007 and 2008 of approximately $1.1 million and
$539,000, respectively, was recorded, of which approximately $1.2 million and
$270,000 was amortized to interest expense during 2008 and 2007.  The
fair value of warrants was computed using a Black-Scholes option pricing model
with the following assumptions: expected term of approximately 7.7 years (based
on the contractual term), volatility of approximately 166% - 180% (based on
historical volatility), zero dividends and interest rate of approximately
4.6%.





2006 Issuances of
Subordinated Notes due in Twelve Months - During 2006, the Company
received $2.8 million pursuant to a private placement of subordinated
convertible notes (the “Subordinated Notes”), bearing interest at 10%, with
principal and accrued interest due 12 months from issuance, convertible into
shares of the Company’s common stock at a price of $0.0975 per share, and
warrants, with cashless exercise provisions, to purchase 28,000,000 shares of
restricted common stock, exercisable until April 2015 at an exercise price of
$0.12 per share (the “Subordinated Notes Warrants”).  The conversion
price of the debentures was subject to anti-dilution downward adjustments in the
event the Company sells common stock or securities convertible into common stock
at a price below the conversion price. The Subordinated Notes rank pari passu
with Private Placement Notes and were subordinated only to the security interest
granted to CIWMB.  The shares underlying the notes and warrants are
subject to piggy back registration rights.  In 2006, the holder of a
$200,000 short-term convertible note payable converted the note, plus accrued
interest into a Subordinated Note of $202,000 and 2,020,000
warrants.  During 2006, debt discount relating to these Subordinated
Notes of approximately $3.2 million was recorded, of which approximately $1.9
million and $1.3 million was amortized to interest expense during 2007 and 2006,
respectively.  The fair value of warrants was computed using a
Black-Scholes option pricing model with the following assumptions: expected term
of 9 years (based on the contractual term), volatility of approximately 180%
(based on historical volatility), zero dividends and interest rate of
approximately 4.6%.  The discount was fully amortized at December 31,
2007. In the event holders of Subordinated Notes elect to convert such
notes into shares of Company common stock, the Company will issue Subordinated
Notes Warrants exercisable into that number of shares of the Company’s common
stock equal to the quotient of (i) 65% of the value of the converted notes
divided by (ii) a per share price of $0.12, a total of 16,260,833 warrants if
all notes are converted. The Subordinated Notes became due in 2007, and in 2007,
Subordinated Notes in the amount of approximately $2.7 million, together with
accrued interest of approximately $269,000, were converted into approximately
30.5 million shares of common stock.  At December 31, 2007, there were
Subordinated Notes approximating $292,000, all of which were subsequently
converted into common stock in 2008.





2006 Issuances of Private
Placement Notes due 18 in Months – During 2006 proceeds were received
into escrow pursuant to a  private placement memorandum (the “PPM”)
through the offering of Units for $25,000 per unit, each Unit consisting of a
$25,000 junior secured subordinated convertible debenture (the “Private
Placement Notes”), bearing interest at 10% with principal and accrued interest
due 18 months from issuance (“maturity date”), convertible into shares of the
Company’s common stock at a price of $0.0975 per share, and a warrant, with a
cashless exercise provision, to purchase 75,000 shares of restricted common
stock of the Company, exercisable until April 15, 2015 at an exercise price of
$0.06 per share (the “Private Placement Warrants”).  The conversion
price of the debentures and exercise price of the warrant are subject to
anti-dilution downward adjustments in the event the Company sells common stock
or securities convertible into common stock at a price below the conversion or
exercise prices. The Private Placement Notes were collateralized by a security
interest in substantially all of the Company’s assets, which such security
interest is subordinated only to the security interest granted to CIWMB, and
rank pari passu with the Subordinated Notes.  The shares underlying
the debentures and warrants are subject to piggy back registration
rights.  In addition, a registration statement must be filed within 30
days after an investor elects to convert all or any portion of the
debenture.  During 2006, proceeds were received for approximately $7.9
million of Private Placement Notes and approximately 23.7 million
warrants.  At December 31, 2006, approximately $1.2 million of
escrowed funds had not been disbursed to the Company, which was reported as a
receivable for cash in escrow for securities sold, and which was received by the
Company in 2007. In 2007, the offering closed and the debentures and warrants
were issued. In 2006, debt discount was recorded, of which approximately $1.8
million was amortized to interest expense in 2007.  During 2007,
Private Placement Notes in the amount of approximately $125,000, together with
accrued interest of approximately $13,000, were converted into approximately 1.4
million shares of common stock.  At December 31, 2007, there were
Private Placement Notes of $2.4 million that were due beyond their maturity
date, all of which were converted into shares of common stock in
2008.





Note
6. Preferred Stock, Common Stock and Stock Warrants





Authorized
Shares – In December 2008,  the Company amended its
Certificate of Incorporation (the “Amendment”) with the state of Delaware to
increase the number of authorized shares of capital stock to Four Billion Two
Hundred Million (4,200,000,000) shares of capital stock (the “Amended Authorized
Amount”).  On January 12, 2009, the Company received notice from the
state of Delaware confirming the Amendment.   Of the Amended
Authorized Amount, Two Billion Five Hundred Million (2,500,000,000) shares are
classified as common stock and One Billion Seven Hundred Million (1,700,000,000)
shares are classified as preferred stock, of which the Company has designated
and authorized 152,843,413 shares as Series A Preferred Stock (the “Series A
Preferred Stock”), 336,240,040 shares as Series B-1 Convertible Preferred
Stock (the “Series B-1 Preferred Stock”), 140,000,000 shares as Series B-2
Convertible Preferred Stock (the “Series B-2 Preferred Stock”, and together with
the Series B-1 Preferred Stock, the “Series B Preferred Stock”), and 400,000,000
shares as Series C Convertible Preferred Stock (the “Series C Preferred
Stock”).  In August 2008, the Company amended its Certificate of
Incorporation with the state of Delaware to authorize a maximum of One Billion
Five Hundred Million (1,500,000,000) shares of $0.001 par value common stock,
and 700,000,000 shares of $0.001 par value preferred stock, of which the Company
designated and authorized 152,843,413 shares as Series A Preferred Stock,
336,240,040 shares as Series B-1Preferred Stock, and 10,916,546 shares as Series
B-2 Preferred Stock.





Preferred Stock - A
summary of the significant rights and privileges of the Series A Preferred
Stock, Series B Preferred Stock and Series C Preferred Stock (together, the
Preferred Stock”) is as follows:





Voting – Each share of
Preferred Stock entitles the holder thereof to vote on all matters except as
required by law, voted on by holders of the Company’s common stock on an
as-converted basis.  For as long as any shares of Series A Preferred
Stock remain outstanding, the affirmative vote of the holders of a majority of
the outstanding shares of Series A Preferred Stock, voting separately as a
single class, shall be necessary to amend the rights, preferences or privileges
of the Series A Preferred Stock, however effected, whether by amendment, merger,
consolidation, recapitalization or otherwise, provided that no such separate
consent of the Series A Preferred Stock shall be required with respect to any
such amendment if a similar amendment is contemporaneously effect with respect
to the rights, preferences or privileges of the Series B Preferred Stock and the
amendment is approved by holders of a majority of the Series B Preferred Stock
then outstanding.  For as long as any shares of Series B Preferred
Stock remain outstanding, the affirmative vote of the holders of a majority of
the outstanding shares of Series B Preferred Stock, voting separately as a
single class, shall be necessary to take certain described actions, however
effected, whether by amendment, merger, consolidation, recapitalization or
otherwise, which include, among others, transactions with affiliates,
except on an arms-length basis, authorization, creation or issuance of any class
of capital stock of the Company ranking senior to or on a parity with the Series
B Preferred Stock, authorizing any increase or decrease in the total authorized
shares or any amendment to the rights, preferences or privileges of the Series A
Preferred Stock or Series B Preferred Stock, and paying any dividend or
distribution on any shares of capital stock of the Company (other than dividends
paid on Preferred Stock).  For so long as 134,496,016 shares of Series
B Preferred Stock (as adjusted for stock dividends, splits or the like) remain
outstanding, holders of Series B Preferred Stock, voting separately as a single
class, shall have the right to elect three Directors (3 of 7) to the
Company’s Board of Directors.





Conversion -Each share of
Preferred Stock is convertible at the option of the holder into fully paid and
non-assessable shares of the Company’s common stock on a one-for-one
basis.  Upon election by holders of a majority of the then outstanding
shares of Series B Preferred Stock, all issued and outstanding shares of
Preferred Stock shall automatically be converted into shares of common stock at
the conversion rate in effect upon conversion, as potentially adjusted for any
dividends or distributions, stock dividends, combinations, splits, and the like
with respect to such shares.  Pursuant to conversion terms, the
Company shall at all times reserve and keep available out of its authorized but
unissued shares of common stock, solely for the purpose of effecting the
conversion of the shares of Preferred Stock, such number of shares as shall be
sufficient to effect the conversion of all such outstanding shares.





Dividends -Holders of
Preferred Stock shall be entitled to receive, on a pari passu basis, when, as
and if declared by the Board of Directors, out of any assets of the Company
legally available therefore, dividends at a  rate of 5% of the
Original Issue Price of such share of Preferred Stock (in each case, as adjusted
for any stock dividends, combinations, splits, recapitalizations and the like
with respect to such shares) per annum prior and in preference to the holders of
the Company’s common stock, and in preference to the holders of any other equity
securities of the Company that may from time to time come into existence to
which the Preferred Stock ranks senior (such junior securities, together with
the Company’s common stock, “Junior Securities”).  No dividends will
be paid on Junior Securities in any year unless such dividends of the Preferred
Stock are paid in full or declared and set apart.  Additionally,
whenever the Company shall pay a dividend on its common stock, each holder of a
share of Preferred Stock shall be entitled to receive, at the same time the
dividend is paid on the common stock, a dividend equal to the amount that would
have been paid in respect of the common stock issuable upon conversion of such
share of Preferred Stock.  As of December 31, 2008, no dividends have
been declared.





Liquidation -In the event of
a voluntary or involuntary liquidation, dissolution, or winding up of the
Company, holders of Series B Preferred Stock are entitled to be paid out first,
prior and in preference to any distribution of any of the assets of the Company
to holders of common stock, Series A Preferred Stock, or any other stock of the
Company ranking junior to the Series B Preferred Stock, an amount per share
equal to the Original Issue Price of $0.02 per share of Series B-1 Preferred
Stock, of $0.0175 per share of Series B-2 Preferred Stock and of $0.015 per
share of Series C Preferred Stock, plus all declared and unpaid dividends on
such shares. After payment of the full liquidation preference of the Series B
Preferred Stock, if assets or surplus funds remain, holders of Series A
Preferred Stock shall be entitled to be paid out first, prior and in preference
to any distribution of any of the assets of the Company to holders of common
stock,  or any other stock of the Company ranking junior to the Series
A Preferred Stock, an amount per share equal to the Original Issue Price of
$0.03 per share, plus all declared and unpaid dividends on such
shares.





Redemption – The
Preferred Stock are not redeemable, except that, in the event of a Change of
Control (as defined), holders of a majority of the then outstanding shares of
Series A Preferred Stock and/or Series B Preferred Stock, separately as two
groups, can require redemption of the Series A Preferred Stock and/or Series B
Preferred Stock, as the case might be, at a redemption price per share equal to
the amount per share to which such holder would be entitled upon a liquidation,
dissolution or winding up of the Company.  A “Change of Control”, as
defined, means (i) the beneficial acquisition by any person or group of 45%
or more of the voting power of the outstanding common stock of the Company, (ii)
the occupancy of a majority of Board seats by persons other than the directors
occupying such seats as of the date of the initial issuance of shares of Series
B Preferred Stock (the “Current Directors”) or persons nominated by Current
Directors or their nominated successors, or (iii) there shall occur a change in
the Chief Executive Officer of the Company without the consent of holders
of a majority of the outstanding shares of Series B Preferred
Stock.  A Change of Control will be treated as a liquidation,
dissolution or winding up of the affairs of the Company with respect to certain
matters, except as otherwise agreed by holders of a majority of the then
outstanding Series B Preferred Stock.





Preferred Stock Issued for
Cash and Exchange of Debt and Other Securities – In June 2008, the
Company issued (i) 165,000,000 shares of its Series B-1 Preferred Stock for $3.3
million cash, (ii) 152,843,413 shares of its Series A Preferred Stock and
111,244,040 shares of its Series B-1 Preferred Stock in exchange for outstanding
Director Notes and Short-term promissory notes having a principal balance of
approximately $7.5 million and related accrued interest payable of $525,000, and
(iii) 60,000,000 shares of its Series B-1 Preferred Stock in exchange for shares
of the Company’s “old” preferred series A preferred stock, which was issued in
exchange for $1.2 million cash received during April and May 2008, and which
such series was eliminated upon exchange. The fair value of shares of
common stock that preferred shares are convertible into exceeded the recorded
value of notes and accrued interest exchanged and cash received by approximately
$9.0 million; this beneficial conversion feature is presented as a constructive
dividend, increasing the net loss in the computation of net loss per share
attributable to holders of common stock. Since the Company has an
accumulated deficit the dividend was charged to additional paid-in capital with
a corresponding credit to additional paid-in capital for the beneficial
conversion value resulting in no net accounting effect. In connection therewith,
the Company entered into an Investor Rights Agreement with investors who
acquired shares of Series A Preferred Stock and Series B Preferred Stock (each
an “Investor” and together “Investors”).  Pursuant to terms of such
agreement, among other things, the Company has agreed to file with the
Securities and Exchange Commission a registration statement to enable the resale
of common shares issuable pursuant to conversion terms of Senior Preferred Stock
and certain warrants issued concurrently, upon written notice of at least 40% of
the then Registrable Securities, as defined, to use reasonable best efforts to
file such registration statement, and such additional registration statements as
may be necessary, at the earliest practicable date on which the Company is
permitted by the SEC guidance to file such additional registration statements,
and to cause such registration statement(s) to become effective and continue to
be effective for such period necessary to provide for, in general, the resale of
such securities with certain exceptions and limitations.  The Investor
Rights Agreement also provides Investors with certain piggy-back registration
rights.  Additionally, pursuant to terms of the Investor Rights
Agreement, for a three year period, each Investor holding at least 5,000,000
shares of common stock or Senior Preferred Stock (each a “Major Holder”), shall,
in general, have a pre-emptive right to receive from the Company prior notice of
any proposed or intended issuance or sale of securities and to purchase such
eligible purchaser’s pro rata percentage of the number of shares of common
stock, as converted and defined, on such same terms and conditions.





In
connection with terms of the First Amendment to Securities Subscription
Agreement pertaining to the purchase of Series A and B Convertible Preferred
Stock, the Company granted to certain purchasers rights to purchase up to an
aggregate of 140 million shares of the Company’s Series B-2 Convertible
Preferred Stock on or prior to March 31, 2009 at a price of $0.0175 per share,
subject to certain terms and conditions of various related agreements, including
the authorization of a sufficient number of shares to be issued.  In
January 2009, the Company received notification from the state of Delaware of
authorization of its amendments to Articles of Incorporation authorizing 140
million shares of Series B-2 Convertible Preferred Stock.





Common Stock- Each
share of common stock is entitled to one voting right, the right to share in
earnings and the right to share in assets upon liquidation.





Common Stock Issued for
Conversion of Series B-1 Convertible Preferred Stock – During 2008,
7,609,802 shares of Series B-1 Convertible Preferred Stock were converted for
that same number of shares of Company common stock.





Common Stock Issued Upon
Induced Conversion of Debt and Exchange of Warrants- During 2008, the
Company issued approximately 243.9 million shares of its common stock in
exchange for full satisfaction of all outstanding convertible notes payable,
which approximated $13.2 million and related accrued interest of approximately
$1.7 million, and the return of outstanding warrants to purchase approximately
38.6 million shares of Company common stock having an exercise price of $0.06
per share and expiring in April 2015, which such warrants were acquired when the
notes were issued.





Additionally,
the Company made a special offer to holders of warrants to purchase Company
common stock  to exchange all outstanding warrants into shares of
Company common stock in a number of shares equal to 60% to 75% (depending on the
warrant) of the number of warrant shares exchanged.  Holders of
approximately 124.2 million warrants accepted the offer and the Company issued
approximately 81.9 million shares of its common stock.  The shares
were valued at approximately $536,000 based on the closing stock price on the
exchange date, and the excess of fair value issued over the fair value of
securities received has been recorded as a loss of approximately
$556,000.





Common Stock Issued in
Exchange for Accounts Payable and Accrued Liabilities - During 2008, the
Company entered into agreements with certain vendors that have provided services
to the Company to issue shares of its common stock in satisfaction of amounts
owed, and in connection with these agreements agreed to issue approximately 15.9
million shares of its common stock in satisfaction of approximately $754,000
owed, which included approximately 12.0 million shares issued in exchange for
$567,000 included in accounts payable – related party at December 31,
2007.   The shares were valued at $829,000 based on the quoted
trading price on the agreement dates, resulting in a loss on payment of
approximately $75,000.





Common Stock Issued for
Conversion of Notes Payable – During 2007, Subordinated Notes in the
amount of approximately $2.7 million, together with accrued interest of
approximately $269,000, were converted into 30,545,769 shares of common stock,
and Private Placement Notes in the amount of approximately $125,000, together
with accrued interest of approximately $13,000, were converted into
approximately 1,415,740 shares of common stock.





Common Stock Issued for
Services - During 2006, the Company entered into an employment agreement
with an individual to serve as its Chief Executive Officer and a Director,
pursuant to which, among other things, the executive received 44,000,000 shares
of Company common stock, of which 26,400,000 were fully vested, and of which
11,000,000 shares vested in 2007, and the remaining vested during the nine
months ended September 2008.  The total value of the shares based on
the grant date quoted trading price of the Company’s common stock was
approximately $5.7 million.  The Company recognized stock-based
compensation expense of approximately $405,000, $1.4 million and $3.9 million in
2008, 2007 and 2006, respectively.  As of December 31, 2008, there was
no additional expense to be recognized with respect to these issuances of equity
securities.





Pursuant
to an agreement with an executive recruiter and placements of the Company’s
Chief Executive and Operating Officers in 2006, the recruiter received
11,456,923 shares of Company common stock, of which 9,036,923 shares were
immediately fully-vested, and of which 2,420,000 shares vested in September
2007, and warrants to purchase 519,750 shares of Company common stock at a per
share price of $0.06 per share exercisable for 10 years, and warrants to
purchase 4,950,000 shares of Company common stock at a per share price of
$0.0975 exercisable for 10 years.  The shares are valued at
approximately $1.5 million based on the quoted trading prices of $0.13 and
$0.135 on the effective dates and the warrants are valued at approximately
$737,000 computed using a Black-Scholes option pricing model with the following
assumptions: contractual term of 10 years, volatility of 183% (based on
historical volatility over the term), zero dividends and interest rate of 4.8%.
The Company recognized stock-based compensation expense of approximately
$445,000 and $1.8 million during 2007 and 2006, respectively.  As of
December 31, 2007, there is no additional expense to be recognized with respect
to these issuances of equity securities.





In
February 2007, the Company entered into an employment agreement with an
individual to serve as its Vice President of Sales & Marketing, pursuant to
which, among other things, the executive received 4.4 million shares of Company
common stock, 1.1 million of which were fully-vested and the remainder vesting
evenly over the next three years, and is entitled to receive warrants to
purchase 1.1 million shares of Company common stock at $0.30 per share on the
one year anniversary of the employment agreement and warrants to purchase 1.1
million shares of Company common stock at $0.40 per share on the second year
anniversary.  The warrants have a four-year term and vest ratably over
3 years.  The shares are valued at approximately $1.1 million based on
the quoted trading price of $0.25 on the effective date and the warrants are
valued at approximately $511,000 computed using a Black-Scholes option pricing
model with the following assumptions: contractual terms of 4 and 10 years,
volatility of 184% (based on historical volatility over the term), zero
dividends and interest rate of 4.5%.  In connection with this
agreement, the Company recorded compensation expense for fully-vested shares and
for a portion of the unvested shares amortized on a straight-line basis over the
vesting periods.  The Company recorded compensation expense of
approximately $367,000 and $792,000 during 2008 and 2007,
respectively.  In addition, the executive received three Private
Placement Units, consisting of $75,000 of Private Placement Notes and Private
Placement Warrants to purchase 225,000 shares of Company common stock, for which
the Company recorded compensation expense of $75,000.  As of December
31, 2008, there was approximately $453,000 of unrecognized compensation expense
related to unvested stock and warrants, which is expected to be recognized as
expense of approximately $300,000 in 2009, and $153,000 in 2010.





In
February 2007, the Company entered into a consulting services agreement, which
terminated December 31, 2007, with the Company’s former Chief Financial Officer,
pursuant to which, among other things, the Company issued to the former officer
492,308 fully-vested shares of its common stock, and agreed to pay annual
compensation of $120,000 in consideration for services during the term and in
exchange for release of any claim to accrued compensation while previously
employed by the Company, which such amount was $168,000.  In
connection with this agreement, the Company recorded the shares issued as an
increase in common stock and additional paid-in capital of approximately
$133,000 based on the $0.27 quoted trading price on the agreement date and
compensation expense of approximately $85,000.





During
2007, the Company granted 5,070,411 shares of Company common stock to various
non-employee service providers and has recorded the fair value of shares issued
based on the closing market price of stock on the respective measurement dates
of approximately $899,000 as an increase in additional paid-in
capital.  Stock-based compensation expense is recognized over the
requisite service periods, all of which expired in 2007 except one relating to
rent, which expired in 2008.





Pursuant
to terms of a 2007 mutual settlement and release agreement, in 2008, the Company
issued 5,000,000 shares of its common stock to a former executive, and the
former executive returned to the Company for cancellation all previously issued
warrants, which include vested warrants to purchase approximately 17 million
shares and forfeited all rights to acquire additional shares under the
employment agreement.  The Company recorded the 5,000,000 shares
issuable, net of the approximately $101,000 fair value of warrants surrendered,
as compensation expense of approximately $249,000 during 2007, based on the
$0.07 quoted trading price of the Company’s common stock and black-scholes fair
value computations at year-end, when it was determined that it was more likely
than not that such an arrangement would be agreed upon.





In 2006,
the Company entered into an employment agreement with its former Chief Executive
Officer to serve as Chief Technology Officer, pursuant to which, among other
things, the executive received 24,000,000 fully-vested shares or share
equivalents (warrants), of which he had previously received 17,953,208 of such
shares and share equivalents.  In connection with this agreement,
inasmuch as the shares were fully vested, the Company recorded compensation
expense and an increase in additional paid-in capital of $847,000, which was
determined on the $0.14 per share quoted trading price on the date of the
employment agreement.  Further, pursuant to this agreement the Company
agreed to issue 2,000,000 shares of its common stock to this executive upon
satisfying obligations, as defined, and in 2007, the Company’s Board of
Directors resolved that such obligations had been satisfied and that the shares
shall be issued.  The Company recorded expense of $160,000, which was
determined based on the $0.08 per share quoted trading price on the date of the
board resolution.  As of December 31, 2007, the shares had not been
issued and are accordingly reported as common stock issuable.  In
2008, the shares were issued.





In 2006,
terms of Common Stock Purchase and Covenant to Adjust Agreements entered into in
2005, were amended to eliminate any further adjustments to the original purchase
price, and the Company recorded the issuance of 752,731 shares and the
previously recorded temporary equity redemption value of approximately $165,000
was reclassified to permanent stockholders’ equity. During 2008, the
Company issued 395,588 shares of its common stock to investors, for which the
Company previously recorded 752,731 shares as issued in 2006, and obtained
releases from such investors as to any additional future liability or
obligations, and as a result in 2008 reported a decrease in shares issued of
357,143 shares in the accompanying statement of changes in stockholders’
equity.





Stock Issued for Settlement
Agreement - During 2007, the Company entered into a settlement agreement
with a former consultant, pursuant to which, among other things, the Company
issued 5 million shares of its common stock, and as a result recorded settlement
expense of $680,000, based on the quoted trading price of the Company’s common
stock of $0.135 per share on the settlement date, which included $5,000 of
related legal expenses.





In 2008,
the Company entered into an agreement with a former officer pursuant to terms of
which, among other things, the officer ceased employment with the Company and
the employment agreement entered into by the Company and officer in 2006
terminated.  In connection with this agreement, the Company paid the
former officer approximately $75,000, the officer transferred to the Company
717,949 shares of Company common stock, and the Company issued 2.5 million
shares of its common stock and paid $50,000 cash to a third party.  As
a result, the Company recorded expense of approximately $178,000 in
2008.





Stock Issued Upon Exercise
of Warrants - During 2007, pursuant to receipt of notices of cash and
cashless exercises of 6,048,439 warrants, the Company issued 4,119,596 shares of
its common stock and received proceeds of approximately
$2,000.





Warrants – In
connection with borrowings and other transactions, the Company issues warrants
to purchase its common stock.  The fair value of warrants issued
during 2008 and 2007 was estimated using the Black-Scholes option-pricing model
with the following assumptions: dividend yield of 0%; expected volatility of
approximately 150% to 180% (based on historical volatility over the terms);
risk-free interest rates of approximately 3% to 5%; and contractual terms of 3.5
to 10 years.  The weighted-average fair value of warrants granted
during 2008 and 2007 was $0.03 and $0.19, respectively.





Stock Warrants Issued for
Services- In October 2006, the Company entered into an employment
agreement with an individual to serve as its Chief Operating Officer, pursuant
to which, among other things, the executive will receive shares of Company
common stock (or stock options, at the executive’s election) covering 5% of
Common Stock Equivalents, as defined in the agreement.  The executive
received options to purchase 24,000,000 shares (shares were not elected) of
Company common stock, of which 12,000,000 were fully-vested, and of which
6,000,000 warrants vest in October 2007 and the remaining 6,000,000 vest
pro-rata from November 2007 to October 2008. The warrants are exercisable at
$0.0975 per share for ten years, and have an estimated fair value of
approximately $3.2 million as determined utilizing the Black-Scholes valuation
model as of the Effective Date with the following assumptions: contractual term
of 10 years, volatility of 174% (based on historical volatility over the term),
zero dividends and interest rate of 4.8%.  During 2007 and 2006, the
Company recognized stock-based compensation expense of approximately $810,000
and $1.8 million, respectively, and as of December 31, 2007, there was
approximately $655,000 of unrecognized compensation expense related to unvested
stock warrants.  Pursuant to terms of a mutual settlement and release
agreement, in early 2008, among other things, the former executive returned to
the Company for cancellation all previously issued warrants and forfeited all
rights to acquire additional shares under the employment agreement, and the
Company issued to the former executive 5,000,000 shares of restricted common
stock.  Warrants cancelled and forfeited are reflected as cancelled in
2007 in the following table of warrant activity, and there will be no further
recognition of compensation expense.





In 2007,
the Company issued warrants to a new Director to purchase 500,000 shares of its
common stock at an exercise price of $0.19 per share with a 4-year term and
recorded compensation expense of approximately $89,000 based on the fair value
as determined utilizing the Black-Scholes valuation model.





In 2007,
the Company entered into an employment agreement with an individual to serve as
its Chief Financial Officer, pursuant to which, among other things, the
executive received warrants to purchase 5,000,000 shares of Company common
stock, 25% of which are fully-vested and the remainder vesting 1,250,000 per
year over the next three years.  The warrants have a four-year term
and an exercise price of $0.12 per share, and are valued at approximately
$540,000 based on a Black-Scholes option pricing model valuation with the
following assumptions: expected term of 4 years, volatility of 160% (based on
historical volatility over the term), zero dividends and interest rate of
4.6%.  In connection with this agreement, the Company will record
compensation expense for fully-vested shares and for a portion of the unvested
shares amortized on a straight-line basis over the vesting
periods.  The Company recorded compensation expense of approximately
$231,000 during 2007.  As of December 31, 2007, there was
approximately $309,000 of unrecognized compensation expense related to unvested
stock and warrants. In March 2008, the executive resigned and was allowed
to retain 1.25 million warrants, which were exchanged for shares of common stock
in connection with the aforementioned warrants for shares
exchange.  The 3.75 million unvested warrants were
cancelled.





In 2007,
the Company issued warrants to a new employee to purchase 2,000,000 shares of
its common stock at an exercise price of $0.0975 with a ten year term and
recorded compensation expense of approximately $204,000 based on the fair value
as determined utilizing the Black-Scholes valuation model. The closing stock
price at the issuance date was $0.19 per share.  The warrants issued
to the new employee were assigned to the Company by one of its other executive
officers, which was recorded as a contribution of capital in accordance with the
provisions of SFAS 123R.  As of December 31, 2007, there was
approximately $176,000 of unrecognized compensation expense related to unvested
warrants.  During 2008, the employee left the Company and was allowed
to retain the warrants on a fully-vested basis and the Company recorded the
remaining $176,000 as expense.





During
2008, the Company issued to certain of its non-employee directors warrants to
purchase 750,000 shares and 1,000,000 shares of its common stock at an exercise
price of $0.22 and $0.07, respectively, with a term of approximately 6.8 years
and recorded compensation expense of approximately $77,000 based on the fair
value as determined utilizing the Black-Scholes valuation model. The closing
stock price at the issuance date was $0.04 per share.





In
connection with, among other things, consummation of the June 2008 financing
transactions resulting in exchanges of outstanding notes payable and receipt of
cash in consideration of the issuance of shares of the Company’s Series A and
Series B-1 Convertible Preferred Stock, the Company issued to each of two of the
Company’s new Directors warrants to purchase 10,918,072 shares of its common
stock at a per share price of $0.02 with a ten-year term.  The
Black-Scholes determined fair value of the warrants of approximately $1.0
million has been accounted for as stock issue costs, which results in an
increase and decrease in additional paid in capital, for no net effect on
stockholders’ equity.





In August
2008, the Company issued to one of its executive officers a warrant for the
purchase of 7,500,000 shares of its common stock at an exercise price of $0.02,
with a term of approximately 10 years.  The warrants vest monthly over
three years contingent upon attainment of certain specified production and other
milestones relating to future periods.  In September 2008, the officer
ceased employment with the Company, the warrants were cancelled unvested, and no
expense was recorded.





During
2008, the Company issued to a consultant warrants for the purchase of 7,500,000
shares of its common stock at an exercise price of $0.015, with a term of
approximately 6.5 years and recorded general and administrative expense of
approximately $145,000 based on the fair value as determined utilizing the
Black-Scholes valuation model. The closing stock price at the issuable date was
$0.02 per share.  In addition, during 2008, the Company issued to a
consultant warrants for the purchase of 300,000 shares of its common stock at an
exercise price of $0.02, with a term of approximately 6.5 years, the estimated
fair value of which approximated $11,000 as determined utilizing the
Black-Scholes valuation model.  The closing stock price at the
issuable dates averaged approximately $0.04 per share.





In 2008,
the Company and an individual agreed to terms of an offer of employment pursuant
to which, among other things, the individual will serve as its Senior Vice
President of Operations and in additional to cash compensation and other
customary employee related benefits received a warrant to purchase 15 million
shares of Company common stock, 25% of which vest at the end of one year and the
remainder vest equally on a monthly basis over the next four
years.  The warrants have a term of approximately 6.5 years and an
exercise price of $0.015 per share and were valued at approximately $287,000 as
determined utilizing the Black-Scholes valuation model and will be expensed over
the vesting period.  The closing stock price at the issuable date was
$0.02 per share. During 2008, approximately $37,000 was recognized as
expense.





In 2008,
the Company and an individual agreed to terms of an offer of employment pursuant
to which, among other things, the individual will serve as its Chief Financial
Officer and in additional to cash compensation and other customary employee
related benefits received a warrant to purchase 20 million shares of Company
common stock, 25% of which vest at the end of one year and the remainder vest
equally on a monthly basis over the next four years.  The warrants
have a term of approximately 6.5 years and an exercise price of $0.015 per share
and were valued at approximately $382,000 as determined utilizing the
Black-Scholes valuation model and will be expensed over the vesting period. The
closing stock price at the issuable date was $0.02 per share. During 2008,
approximately $8,000 was recognized as expense.





Certain
of the Company’s outstanding warrants have exercise prices that are subject to
downward adjustments in the event the Company sells certain of its equity
securities at per share prices less that originally established exercise
prices.  Additionally, certain of such warrants also contain
provisions providing for an increase in the number of shares warrants that may
be exercised.  The following schedules of warrants outstanding and
activity give effect to such adjustments.





The
intrinsic value of stock warrants is calculated by aggregating the difference
between the closing market price of the Company’s common stock at the reporting
period end and the exercise price of warrants which have an exercise price less
than the closing price.





The
following summarizes activity for stock warrants issued to lenders for
borrowings, all of which are exercisable:




Outstanding
              
              
              Weighted average exercise
    price
              
              
              Weighted average remaining contractual life in
      years
              
              
              Aggregate
      intrinsic value (in thousands)Balance
      at December 31, 2007
              
              
              123,406,817
              
              
              $
              0.09
              
              
              
              6.2
              
              
              $
              962Issued
              
              
              259,632,078
              
              
              
              0.02Increase
      for price adjustment
              
              
              3,833,333
              
              
              
              0.02Exchanged
              
              
              (129,691,141
              )Balance
      at December 31, 2008
              
              
              257,181,087
              
              
              $
              0.02
              
              
              
              6.3
              
              
              $
              1,205




The
following summarizes activity for stock warrants issued to consultants for
services, all of which are exercisable:




Outstanding
            
            
            Weighted average exercise
    price
            
            
            Weighted average remaining contractual life in
      years
            
            
            Aggregate
      intrinsic value (in thousands)Balance
      at December 31, 2007
            
            
            31,715,179
            
            
            $
            0.08
            
            
            
            5.6
            
            
            $
            220Issued
            
            
            21,836,144
            
            
            
            0.02Issuable
            
            
            7,800,000
            
            
            
            0.02Exchanged
            
            
            (9,325,693
            )
            
            
            0.10Balance
      at December 31, 2008
            
            
            52,025,630
            
            
            $
            0.03
            
            
            
            7.5
            
            
            $
            37




The
following summarizes activity for stock warrants issued to employees and
directors, of which 2,055,556 are exercisable:




Outstanding
            
            
            Weighted average exercise
    price
            
            
            Weighted average remaining contractual life in
      years
            
            
            Aggregate
      intrinsic value (in thousands)Balance
      at December 31, 2007
            
            
            27,575,000
            
            
            $
            0.09
            
            
            
            5.6
            
            
            $
            151Issued
            
            
            9,250,000
            
            
            
            0.04Issuable
            
            
            36,100,000
            
            
            
            0.02Exchanged
            
            
            (23,825,000
            )
            
            
            0.08Forfeited
            
            
            (11,250,000
            )
            
            
            0.05Balance
      at December 31, 2008
            
            
            37,850,00
            
            
            $
            0.03
            
            
            
            6.3
            
            
            $
            175




The
following summarizes activity for all stock warrants:




Outstanding
            
            
            Weighted average exercise
    price
            
            
            Weighted average remaining contractual life in
      years
            
            
            Aggregate
      intrinsic value (in thousands)Balance
      at December 31, 2007
            
            
            182,696,996
            
            
            $
            0.09
            
            
            
            6.1
            
            
            $
            1,333Issued
            
            
            290,718,222
            
            
            
            0.02Issuable
            
            
            43,900,000
            
            
            
            0.05Increase
      for price adjustment
            
            
            3,833,333
            
            
            
            0.02Exchanged
            
            
            (162,841,834
            )
            
            
            0.08Forfeited
            
            
            (11,250,000
            )
            
            
            0.05Balance
      at December 31, 2008
            
            
            347,056,717
            
            
            $
            0.02
            
            
            
            6.5
            
            
            $
            1,418




Additional
information regarding all warrants outstanding as of December 31, 2008, is as
follows:




Exercise prices
              
              Shares
              
              Weighted
      average remaining
  life$
              0.00
              
              
              60,000
              
              2.5
      years$
              0.02
              
              
              292,374,420
              
              6.3
      years$
              0.02
              
              
              30,692,667
              
              7.8
      years$
              0.05
              
              
              1,100,000
              
              1.5
      years$
              0.06
              
              
              18,979,630
              
              6.3
      years$
              0.07
              
              
              1,000,000
              
              6.3
      years$
              0.12
              
              
              1,000,000
              
              7.2
      years$
              0.22
              
              
              750,000
              
              6.2
      years$
              0.30
              
              
              1,100,000
              
              6.2
      yearsTotal
              
              347,056,717
              
              6.5
      years




Note
7.   Related Party Transactions




As
summarized in Note 6, certain of the Company’s Directors, Officers and their
affiliates are holders of the Company’s notes payable in the aggregate amount of
approximately $5.7 million and $9.3 million at December 31, 2008 and 2007,
respectively.  Accrued interest payable on the notes approximated
$134,000 and $846,000 at December 31, 2008 and 2007,
respectively.  Amounts payable at December 31, 2007 were exchanged for
shares of Company common stock in 2008.





Included
in accounts payable to related parties at December 31, 2008 and 2007 is
approximately $36,000 and $55,000 due to certain of the Company’s officers,
primarily relating to deferred compensation and expense reimbursements
owed.





As
disclosed further in Note 10, in November 2008, the Company entered into a
supply agreement with a company (the “Purchaser”), which holds approximately
$1.5 million of Convertible Notes due December 2011 and warrants to purchase
approximately 50 million shares of Company common stock, and which has the right
to and has designated a person to be a member of the Company’s Board of
Directors.  The Supply Agreement was entered into prior to the
Purchaser’s acquisition of securities.  Pursuant to terms of the
Supply Agreement, among other things, if the Purchaser is in need of at least
1.5 million pounds of Products (as defined) for any calendar month during the
three year term, then the Purchaser shall order its requirements for 1.5 million
pounds from the Company, and the Company has agreed to sell Products to the
Purchaser in accordance to a contractual pricing formula.  During
2008, sales of Product to Purchaser approximated $1.7
million.  Accounts receivable from Purchaser at December 31, 2008
approximated $73,000.





Pursuant
to an agreement for legal services with The Otto Law Group, PLLC (“OLG”), a law
firm, the managing partner of which was until December 2008 one of the Company’s
Directors, the Company periodically issued to the law firm vested
non-forfeitable common shares, and proceeds from the sale of such shares by the
firm and reported to the Company were credited against invoice amounts due for
legal services. During 2008 and 2007, the Company incurred fees for OLG legal
services of approximately $327,000 and $293,000,
respectively.   In March 2008, the Company issued approximately
12.0 million shares of its common stock in exchange for satisfaction of accounts
payable to the firm of approximately $567,000.  At December 31, 2008,
accounts payable due to the firm for services of $95,000 are included in
accounts payable to related party.





In 2008,
the Company entered into an agreement with a former officer pursuant to terms of
which, among other things, the officer ceased employment with the Company and
the employment agreement entered into by the Company and officer in 2006
terminated.  In connection with this agreement, the Company paid the
former officer approximately $75,000, the officer transferred to the Company
717,949 shares of Company common stock, and the Company issued 2.5 million
shares of its common stock and paid $50,000 cash to a third party.  As
a result, the Company recorded expense of approximately $178,000 in
2008.





Note
8.  Income Taxes





At
December 31, 2008, the Company has available approximately $45 million of net
operating loss carryforwards available to offset future federal income taxes,
which expire through 2028. Realization is dependent on generating sufficient
taxable income prior to expiration of the loss carryforwards. A change of
greater than 50% of the Company ownership could significantly limit
utilization.  At December 31, 2008 and 2007, the Company has provided
a valuation allowance to reduce its net deferred tax asset to zero. The
valuation allowance increased by approximately $4.4 million and $4.5 million
during 2008 and 2007, respectively.





Deferred
income taxes represent the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes
and income tax purposes.  Significant components of deferred tax
assets and liabilities consist of the following at December 31, 2008 and 2007
(in thousands):




2008
              
              
              2007Deferred
      tax assetsNet
      operating loss carryforward
              
              $
              17,845
              
              
              $
              12,788Current
      assets
              
              
              7
              
              
              $
              -Accrued
      liabilities due to related parties
              
              
              45
              
              
              
              235Total
      deferred tax assets
              
              
              17,897
              
              
              
              13,023Deferred
      tax liabilities - property and equipment
              
              
              (667
              )
              
              
              (228
              )Net
      deferred taxs assets before valuation allowance
              
              
              17,230
              
              
              
              12,795Valuation
      allowance
              
              
              (17,230
              )
              
              
              (12,795
              )Net
      deferred taxs assets
              
              $
              -
              
              
              $
              -
  A
reconciliation of the provision for income tax with income tax computed by
applying the federal statutory income tax rate to loss before provision for
income taxes for years ended December 31 is as follows:




2008
              
              
              2007Income
      tax benefit computed at statutory rate
              
              
              -34
              %
              
              
              -34
              %State
      income tax benefit, net of federal benefit
              
              
              -3
              %
              
              
              -3
              %Nondeductible
      stock-based compensation and other
              
              
              17
              %
              
              
              21
              %Valuation
      allowance
              
              
              20
              %
              
              
              16
              %Effective
      tax rate
              
              
              0
              %
              
              
              0
              %






Note 9. Participation
Certificates Obligations Issued Prior to 2004





In 2000,
the Company’s Board of Directors authorized the issuance of common stock to
various investors.  An agreement between the Company’s then President
and investors allowed participants in the Italian General Plastics Development
Program to make advances based on Company common stock. Funds thus generated
(approximately $815,000) were to be repaid when the Company became a public
company. Upon repayment of funds advanced, investors would retain their stock
ownership. To comply with Italian regulations, the Company’s then President
personally issued shares of Company common stock to the investors. Funds
advanced by investors were made to and deposited in accounts in the former
President's name.  The Company’s former President has represented that
funds received were assets of Company and that the Company assumed the related
obligations, and accordingly, based on the substance of the transactions, funds
advanced have been presented as Company liabilities in the accompanying balance
sheet.  Prior to December 31, 2004, the Company entered into various
agreements, including a settlement and release agreement, with certain investors
pursuant to which the investors received shares of Company common stock in
exchange for their participation certificates.  The balance
outstanding approximates $354,000, which has not changed since
2004.





Note
10.  Commitments and Contingencies




Legal – On
February 27, 2009, a former vendor filed a Complaint for Breach of Negotiable
Instrument, Breach of Contract and Demand for Jury Trial against the Company in
the United States District Court for the District of Minnesota.  The
Company was served on April 2, 2009.  The former vendor has, among other
things, prayed for judgments against the Company of approximately
$626,000.  The Company intends to vigorously defend this action, and
cannot, at this time, reasonably predict the ultimate outcome of the
proceedings, if any, that will occur.  The Company establishes
accruals for specific liabilities in connection with legal actions deemed to be
probable and reasonably estimable.  No material amounts have been
accrued in these accompanying financial statements with respect to any legal
matters. Company management does not expect that the ultimate resolution of
pending legal matters in future periods, including the matter described above
will have a material effect on the Company’s financial condition or results of
operations.





Leases – The Company
leases space for its recycling plant and offices in Riverbank,
California.   In 2008, the Company entered into amendments of its
lease agreement, as amended, exercising its option to extend the expiration of
the lease from May 2009 through March 2010 and to rent additional
space.  The Company has an option to extend the lease for an
additional five years. Future minimum lease payments approximate $448,000
in 2009 and $115,000 in 2010.  The Company also rents office space in San
Francisco pursuant to a lease expiring in 2009, for which future minimum lease
payments total $20,000.





Total
rent expense was $448,000 and $341,000 in 2008 and 2007,
respectively.





Supply Agreement – In
November 2008, the Company entered into a supply agreement with a company (the
“Purchaser”), which holds approximately $1.5 million of Convertible Notes due
December 2011 and warrants to purchase approximately 50 million shares of
Company common stock, and which has the right to and has designated a person to
be a member of the Company’s Board of Directors.  The Supply Agreement
was entered into prior to the Purchaser’s acquisition of
securities.  Pursuant to terms of the Supply Agreement, among other
things, if the Purchaser is in need of at least 1.5 million pounds of Products
(as defined) for any calendar month during the three year term, then the
Purchaser shall order its requirements for 1.5 million pounds from the Company,
and the Company has agreed to sell Products to the Purchaser in accordance to a
contractual pricing formula.  During 2008, sales of Product to
Purchaser approximated $1.7 million.





Note
11.  Subsequent Events through April 13 ,
2009





As
disclosed in Note 10, on February 27, 2009, a Complaint was filed against the
Company, and on April 2, 2009 the Company was served.




On April
13, 2009, the Company raised $100,000 in short-term 8% convertible promissory
notes due in 6 weeks.  The Company expects to receive an additional
$200,000 on or before April 15, 2009, pursuant to promissory notes executed on
April 13, 2009.  The Notes accrue interest at 8% and mature after 6
weeks.  At the election of the holders, the Notes can convert into Series C
Convertible Preferred Stock at a price per share equal to $0.015 (subject to
appropriate adjustment for all stock splits, subdivisions, combinations,
recapitalizations and the like).




Note
12.  Quarterly Financial Data (unaudited)





Summarized
quarterly financial information relating to operating results during the years
ended December 31, 2008 and 2007 is presented below (in thousands, except per
share data):




Three
      months ended in 2008
              
              
              Three
      months ended in 2007March
      31
              
              
              June
      30
              
              
              September
      30
              
              
              December
      31
              
              
              March
      31
              
              
              June
      30
              
              
              September
      30
              
              
              December
      31(restated
      (c))Revenues
              
              $
              1,510
              
              
              $
              1,410
              
              
              $
              2,525
              
              
              $
              1,245
              
              
              $
              99
              
              
              $
              418
              
              
              $
              1,450
              
              
              $
              2,372Gross
      margin
              
              
              (83
              )
              
              
              44
              
              
              
              633
              
              
              
              355
              
              
              
              (75
              )
              
              
              (11
              )
              
              
              202
              
              
              
              3Loss
      from operations (a)
              
              
              (3,261
              )
              
              
              (3,003
              )
              
              
              (3,293
              )
              
              
              (2,728
              )
              
              
              (3,401
              )
              
              
              (4,636
              )
              
              
              (3,405
              )
              
              
              (4,589
              )Net
      loss (b)
              
              
              (11,598
              )
              
              
              (3,693
              )
              
              
              (3,823
              )
              
              
              (4,866
              )
              
              
              (6,810
              )
              
              
              (8,375
              )
              
              
              (8,091
              )
              
              
              (9,350
              )Net
      loss attributable to holders of common stock (c)
              
              
              (11,598
              )
              
              
              (12,650
              )
              
              
              (3,823
              )
              
              
              (4,866
              )
              
              
              (6,810
              )
              
              
              (8,375
              )
              
              
              (8,091
              )
              
              
              (9,350
              )Net
      loss attributable to holders of commonstock
      per common share, basic and diluted (c,d)
              
              $
              (0.04
              )
              
              $
              (0.02
              )
              
              $
              (0.01
              )
              
              $
              (0.01
              )
              
              $
              (0.05
              )
              
              $
              (0.06
              )
              
              $
              (0.05
              )
              
              $
              (0.05
              )(a)
      - The three months ended June 30, 2007, includes settlement expense of
      $740.(b)
      - The three months ended March 31, 2008 includes other expense of $3,458
      representing the excess of fair value of common stock issued in exchange
      for notes
      payable, accrued interest and accounts payable and
      warrants.(c)
      - The net loss attributable to holders of common stock and related per
      share loss for the three months ended June 30, 2008 has
      been restated from that previously reported to include a $8,957
      constructive dividend related to the beneficial conversion feature related
      to convertible
      preferred stock. There is no effect on previously reported amounts of
      loss from operations, net loss, assets, liabilities, stockholders' equity
      or cash flows.(d)
      - The total of quarterly amounts per share in 2008 does not equal the
      annual amount per share due to
rounding.





Item
9.                                Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure.





Not
applicable.





Item
9A.                      Controls
and Procedures





Disclosure Controls and
Procedures.As of the end of the period covered by this Annual
Report on Form 10-K, we carried out an evaluation, under the supervision and
with the participation of senior management, including our Chief Executive
Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the
design and operation of our disclosure controls and procedures (as such term is
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended (the “Exchange Act”).  Based upon that evaluation,
our CEO and CFO concluded that our disclosure controls and procedures were
effective in recording, processing, summarizing and reporting, on a timely
basis, information required to be disclosed by us in the reports that we file or
submit under the Exchange Act.





Internal Control over Financial
Reporting.There have been no changes in our internal controls
over financial reporting or in other factors during the fiscal quarter ended
December 31, 2008 that materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting subsequent to
that date we carried out our most recent evaluation.





Management Report on Internal
Control.Our management is responsible for establishing and
maintaining adequate internal control over financial reporting. Internal control
over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) under the
Securities Exchange Act, as amended, as a process designed by, or under the
supervision of, a company’s principal executive and principal financial officers
and effected by a company’s board of directors, management and other personnel
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. Our internal control over
financial reporting includes those policies and procedures that:




·
            pertain
      to the maintenance of records that, in reasonable detail, accurately and
      fairly reflect the transactions and dispositions of our
      assets;


·
            provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with generally accepted
      accounting principles, and that our receipts and expenditures are being
      made only in accordance with authorizations of our management and
      directors; and


·
            provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use or disposition of our assets that could have
      a material effect on the financial
  statements.




Internal
control over financial reporting cannot provide absolute assurance of achieving
financial reporting objectives because of its inherent limitations. 
Internal control over financial reporting is a process that involves human
diligence and compliance and is subject to lapses in judgment and breakdowns
resulting from human failures. Internal control over financial reporting also
can be circumvented by collusion or improper management override.  Because
of such limitations, there is a risk that material misstatements may not be
prevented or detected on a timely basis by internal control over financial
reporting. However, these inherent limitations are known features of the
financial reporting process.  Therefore, it is possible to design into the
process safeguards to reduce, though not eliminate, this risk.  In
addition, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in
conditions or that the degree of compliance with the policies or procedures may
deteriorate.




Management
has evaluated the effectiveness of our internal control over financial reporting
as of December 31, 2008 based on the control criteria established in a report
entitled Internal Control –
Integrated Framework,issued by the Committee of Sponsoring Organizations
of the Treadway Commission (“COSO"), and this
assessment identified the following material weaknesses in the Company’s
internal control over financial reporting.




·
            Inadequate
      or ineffective policies for documenting policies, processes and
      transactions; and






·
            Inadequate
      or ineffective internal control environment related to segregation of
      duties.




Because
of the above described material weaknesses, management believes that, as of
December 31, 2008, the Company’s internal control over financial reporting was
not effective based on those criteria. As a result, we have put an
implementation plan in place whereby in 2009 additional resources will be
directed to documentation of processes and segregation of duties to satisfy COSO
requirements.  Despite material weaknesses noted, we believe that our
financial statements contained in our 2008 Annual Report filed with the SEC
fairly present our financial position, results of operations and cash flows as
of and for the periods presented in all material respects.





This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
management’s report in this Annual Report.





Management’s Assessment as of
December 31, 2007 and Material Weakness -In order to evaluate the
effectiveness of our internal control over financial reporting as of December
31, 2007, as required by Sections 404 of the Sarbanes-Oxley Act of 2002, our
management commenced an assessment, based on the criteria set forth in COSO. A
material weakness is a control deficiency, or a combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of our annual or interim financial statements will not be prevented
or detected on a timely basis. In assessing the effectiveness of our internal
control over financial reporting, our management, including the CEO and interim
CFO, could not conclude that our internal controls and procedures were
sufficient to ensure that we maintained appropriate internal control over
financial reporting at December 31, 2007, as while we considered the criteria
established in COSO, we did not perform a complete assessment as outlined in
Commission Guidance Regarding Management’s Report on Internal Control Over
Financial Reporting Under Section 13(a) or 15(d) of the Exchange Act. In
summary, the Company did not conduct sufficient testing of internal controls in
2007 to satisfy COSO requirements. As a result, we have put an implementation
plan in place whereby in 2008 sufficient testing to satisfy COSO requirements
will be performed. The absence of the ability to conclude as to the sufficiency
of internal controls is a material weakness.  Despite the insufficient
testing, we believe that our 2007 financial statements contained in our 2008 and
2007 Annual Reports filed with the SEC fairly present our financial position,
results of operations and cash flows for the fiscal year ended December 31, 2007
in all material respects.




Item
10.                      Directors
and Executive Officers of the Registrant





NAME
            POSITIONRodney
      S. Rougelot
            Director
      and Chief Executive OfficerRay
      Salomon
            Chief
      Financial OfficerG.
      Thompson Hutton
            ChairmanWilliam
      Whittaker
            DirectorDavid
      Buzby
            DirectorJohn
      Moragne
            DirectorAlex
      Millar
            DirectorCraig
      Hardy
            Former
      Chief Financial OfficerMario
      Sandoval
            Former
      Chief Operating OfficerGary
      M. De Laurentiis
            Former
      Director and Chief Technology OfficerRoy
      A. Herberger
            Former
      DirectorDavid
      M. Otto
            Former
      DirectorLawrence
      A. Krause
            Former
      DirectorRonald
      M. Domingue
            Former
      Director





Rodney
S. Rougelot


Director
and Chief Executive Officer


Mr.
Rougelot, 45, brings to ECO2over 20
years of extensive experience in recycling, operations, finance, and mergers and
acquisitions.  Upon graduating from Harvard Business School, Mr.
Rougelot founded Recycling Resource, LLC (“Recycling Resource”) in 1991, which
rapidly became one of the leading recycling companies in
California.  After Recycling Resource was acquired by TomraSystems ASA
(OSLO: TOM) in 1998, Mr. Rougelot served as President of the commercial
division, building the Tomra Pacific operation into one of the largest beverage
container recyclers in the United States.  Most recently in 2006, Mr.
Rougelot was engaged through Stone Yamashita Partners as a strategic consultant
with The Coca Cola Company.  Mr. Rougelot has served as Director and
Chief Executive Officer since July 2006 and served as interim Chief Financial
Officer from March 2008 until December 15, 2008.





Mr.
Rougelot is not a director of any other public company, nor is he related to any
officer, director or affiliate of the Company.  Mr. Rougelot is not a
party to any pending legal proceeding, nor has he been subject to a bankruptcy
petition filed against him, nor been convicted in, or subject to, any criminal
proceeding.





Ray
Salomon


Chief
Financial Officer


Mr.
Salomon, 47, has over twenty years of financial and operational management
experience.  Mr. Salomon was appointed Chief Financial Officer on
December 15, 2008.  Most recently, Mr. Salomon was the Chief Financial
Officer of Barrier Systems, Inc. (“Barrier”) where he was responsible for
finance, accounting, information technology and human
resources.  While at Barrier, Mr. Salomon also designed and
implemented reporting processes and achieved full Sarbanes-Oxley
compliance.  From 2003-2007, Mr. Salomon was the Director of Finance –
Marketing and Sales, Western and Central U.S. for the Ford Motor Company. Prior
to Ford Motor Company, Mr. Salomon served as Revenue Manager and as Director of
Financial Planning and Reporting for Lincoln Mercury, where he was responsible
for groups setting vehicle prices and where he developed and managed revenue
forecasting and accounting.  Mr. Salomon earned a Masters in Business
Administration degree in 1985 and a Bachelor of Arts in Economics in 1982 from
the University of California, Berkeley.





Mr.
Salomon is not a director of any other public company, nor is he related to any
officer, director or affiliate of the Company.  Mr. Salomon is not a
party to any pending legal proceeding, nor has he been subject to a bankruptcy
petition filed against him, nor been convicted in, or subject to, any criminal
proceeding.





G.
Thompson Hutton


Chairman
of the Board of Directors


Mr.
Hutton is currently the Managing Partner of Thompson Hutton, LLC, where he has
actively pursued and managed private equity and venture capital investments in
partnership with a number of leading firms since 2003.  Additionally,
from 2006-2007, Mr. Hutton served as Chief Executive Officer of White Mountains
Reinsurance Group, Ltd. (“White Mountains”), a holding company based in
Hamilton, Bermuda.  White Mountains acts as a broker-market Property
and Casualty reinsurance company and has approximately $2 Billion in capital and
in annual premium volume.  As the Chief Executive Officer of White
Mountains, Mr. Hutton was one of five senior partners of White Mountains
Insurance Group, the publicly held parent company.  From 2000-2002,
Mr. Hutton served as a Venture Partner at Trident Capital, Inc., and as an
adviser/consultant to Sutter Hill Ventures and Morgan Stanley Capital Partners.
Mr. Hutton received a Masters in Business Administration with Distinction from
Harvard Business School in 1986, and Bachelor degrees in mechanical engineering
and economics from Stanford University in 1978 and 1977,
respectively.  He currently serves as a Trustee of the Phillips Exeter
Academy in New Hampshire.





Mr.
Hutton is not a director of any other public company, nor is he related to any
officer, director or affiliate of the Company.  Mr. Hutton is not a
party to any pending legal proceeding, nor has he been subject to a bankruptcy
petition filed against him, nor been convicted in, or subject to, any criminal
proceeding.





Roy
A. Herberger


Former
Director


Mr.
Herberger served as director from May 17, 2007 until his resignation on March
31, 2009.  Mr. Herberger is currently President Emeritus of the
Thunderbird School of Global Management.  From 1989 until August 2004,
Mr. Herberger served as President of Thunderbird, the Gavin Graduate School of
International Management in Glendale, Arizona.  His experience
includes research and consultancies with several major Asian
corporations.  Mr. Herberger has also published numerous articles on
international business negotiations in United States and international academic
and business periodicals.  He currently is a director of the Mayo
Clinic, Rochester; Pinnacle West Capital Corporation and MedAire,
Inc.  Mr. Herberger graduated from the University of Colorado in 1971
with a PhD in business and from the University of Texas, Austin with a M.A. in
1968 and B.A. in 1966.  Mr. Herberger was appointed as Director in May
2007.




William
Whittaker


Director


Mr.
Whittaker brings extensive asset management experience, both in real estate and
investment management, to ECO2.  Mr.
Whittaker currently manages assets worth approximately $125 million through
Whittaker Asset Management, Inc., a company of which he has been the Chairman
and CEO of since 1987.  Mr. Whittaker is also the controlling
principal of more than 40 privately held companies and/or partnerships that
either own commercial income properties or invest in operating
businesses.  Mr. Whittaker graduated from Stanford University in 1971
with an Economics degree and from the University of Santa Clara School of Law,
cum laude, in
1976.  He was admitted to the California State Bar in 1976 (inactive
1996) and the United States Tax Court in 1979.  Mr. Whittaker was appointed
as a Director in February 2007.





Mr.
Whittaker is not a director of any other public company, nor is he related to
any officer, director or affiliate of the Company.  Mr. Whittaker is
not a party to any pending legal proceeding, nor has he been subject to a
bankruptcy petition filed against him, nor been convicted in, or subject to, any
criminal proceeding.








David
Buzby


Director


Mr. Buzby
is a private equity investor and entrepreneur.  Since 1991, Mr. Buzby
has been investing in early stage environmental and e-commerce companies,
serving as a Director and/or in other senior management roles.  Since
2007, Mr. Buzby has served as a Director of Xunlight, a thin-film flexible
photovoltaic manufacturer and, since 2004, Mr. Buzby has served as the Chairman
of SunEdison, LLC, a solar services company in the US and Europe.  Mr.
Buzby, since 1998, has also served as the Lead Director and as past Chairman of
the Audit Committee from 2000-2007, of ValueClick (NASD:VCLK), an online
marketing company.  Mr. Buzby founded Reid Industries in 2004, a
manufacturer and e-tailer of products for seniors.  In 1991, Mr. Buzby
and Rodney S. Rougelot, CEO of the Company, jointly founded Recycling Resource,
a multi-material recycling company based in California.  Recycling Resource
grew to be one of the largest independently owned recyclers in Northern
California before being sold to TomraSystems ASA(OSLO:TOM) in
1998.  Prior to these experiences, Mr. Buzby worked for a private
leveraged buy-out group acquiring and operating manufacturing and distribution
businesses and has worked in international banking. In 1988, Mr. Buzby received
a Masters in Business Administration from Harvard University and in1982, he
received a Bachelors of Arts degree from Middlebury College.





Aside
from the above, Mr. Buzby is not a director of any other public company, nor is
he related to any officer, director or affiliate of the Company.  Mr.
Buzby is not a party to any pending legal proceeding, nor has he been subject to
a bankruptcy petition filed against him, nor been convicted in, or subject to,
any criminal proceeding.





John
Moragne


Director


Mr.
Moragne is a co-founder of Trident Capital and has been a Managing Director
since 1993. From 1989 to 1993, Mr. Moragne was a Principal with Bain Capital, a
leveraged buyout firm affiliated with Bain & Company. He was also a
Principal of Information Partners Capital Fund, a private equity firm associated
with Dunn & Bradstreet Enterprises and Bain Capital. Earlier in his career,
Mr. Moragne was a management consultant with Bain & Company.





Mr.
Moragne’s current directorships of public entities include AirTight Networks,
BenefitPoint, Chamberlin Edmonds, Datatel, E&C Medical Intelligence,
HomeAway, Inc., Infopia, Intagio Group, Turn, Inc. and Vixxi
Solutions.  Mr. Moragne’s past directorships include MapQuest.com,
Inc. (MQST) (acquired by AOL), Newgen Results Corporation (NWGN) (acquired by
Teletech Corporation (TTEC)), bamboo.com (acquired by Internet Pictures (IPIX)),
Daou Systems, Inc. (DAOU), Frisco Holdings, Inc., Internet Profiles Corporation
(acquired by CMGI), Medicode, Inc. (acquired by United Healthcare (UNH)),
Resolution Health (acquired by WellPoint (NYSE: WLP), Vality Technology, Inc.
(acquired by Ascential Software (ASCL)), boats.com (acquired by Trader
Publishing Company), and ClaimIQ (acquired by Mitchell International), and
UltraLink, Inc.(acquired by Secova eServices, Inc.).  Mr.Moragne was
also a board observer to Webify Solutions, Inc. (acquired by IBM).





Mr.
Moragne received a B.A. from Dartmouth College in 1979, an M.S. from Stanford
University in 1983 and an M.B.A. from the Stanford University Graduate
School of Business in 1986.





Aside
from the above, Mr. Moragne is not a director of any other public company, nor
is he related to any officer, director or affiliate of the
Company.  Mr. Moragne is not a party to any pending legal proceeding,
nor has he been subject to a bankruptcy petition filed against him, nor been
convicted in, or subject to, any criminal proceeding.





Alex
Millar


Director


Mr.
Millar is a member of the founding team of Peninsula Packaging, LLC, a privately
held integrated manufacturer of polyethylene terephthalate food and industrial
packaging products.  Since July 2002, Mr. Millar has served as the
Managing Director of Peninsula Packaging, LLC.  In March 2000, Mr.
Millar founded Bluefish Ventures (“Bluefish”), an early stage venture capital
fund focused on developing new technologies.  He has also served as
the General Partner of Bluefish since March 2000.  Prior to founding
Bluefish, Mr. Millar worked as an investment banker with the firm Donaldson,
Lufkin & Jenrette.





In
October 2008, Mr. Millar joined the Board of Directors of Pitchbook, an
independent and impartial research firm dedicated to providing premium data,
news and analysis to the private equity industry.  In July of 2004,
Mr. Millar joined LiveVox as Chairman of the Board of
Directors.  LiveVox is the leading on-demand, integrated voice
applications solution for contact centers.  Since February 2001, Mr.
Millar has served on the Board of Directors of Vivaro
Corporation.  Vivaro offers prepaid telecommunications and
international money transfer services targeting the Hispanic
community.   In addition, Mr. Millar serves as an advisor to
Wedding Book, an online service bringing transparency to the local wedding
vendor marketplace.





Mr.
Millar earned a Bachelors of Applied Science from the Moore School of
Engineering at the University of Pennsylvania in 1997 and a Bachelors of Science
in Economics from the Wharton School of Business in 1997.





Mr.
Millar is not a director of any other public company, nor is he related to any
officer, director or affiliate of the Company.  Mr. Millar is not a
party to any pending legal proceeding, nor has he been subject to a bankruptcy
petition filed against him, nor been convicted in, or subject to, any criminal
proceeding.





Craig
Hardy


Former
Chief Financial Officer


Mr.
Hardy, 40, served as Chief Financial Officer from August 2007 until his
resignation, effective March 2008.





Mario
Sandoval


Former
Chief Operating Officer


Mr.
Sandoval, 45, served as Chief Operating Officer from October 2006 until his
resignation, effective March 1, 2008.





Gary
M. De Laurentiis


Former
Director and Chief Technology Officer


Mr. De
Laurentiis, 63, has previously served as the Chairman, President and CEO since
founding the Company in 1999.  Most recently, Mr. De Laurentiis served
as Chief Technology Officer from July 2006 until his resignation in September
2008.  Mr. De Laurentiis resigned as a Director of the Company in June
2008.





David
M. Otto


Former
Director


Mr. Otto
has served as a Director from February 2006 until his resignation in December
2008.  Mr. Otto continues to serve as general counsel of the
Registrant.





Lawrence
A. Krause


Former
Director


Mr.
Krause served as a Director from February 2006 until his resignation in June
2008.





Ronald
M. Domingue


Former
Director


Mr.
Domingue served as a Director from December 2006 until his resignation in June
2008.





Audit
Committee Financial Expert





Mr. David
Buzby serves as the audit committee financial expert.




Compliance
with Section 16(a) of the Exchange Act





Section
16(a) of the Exchange Act requires the Company’s officers, directors and persons
who beneficially own more than 10% of the Company’s common stock to file reports
of ownership and changes in ownership with the SEC. These reporting persons also
are required to furnish the Company with copies of all Section 16(a) forms they
file. None of the officers or directors of the Company have provided to the
Company any filed reports upon their acquisition or disposition of securities of
the Company. With the exception of the aforementioned, to the Company’s
knowledge, no officers, directors and persons who beneficially own more than 10%
of the Company’s common stock have failed to file the reports required pursuant
to Section 16(a).





Code
of Ethics





The
Company has adopted a Revised Code of Ethics. The Revised Code of Ethics is
incorporated by reference as Exhibit 14.1. The Company hereby undertakes to
provide any person without charge, upon request, a copy of the Company’s Code of
Ethics. Requests for copies of the Company’s Code of Ethics should be sent
to:





ECO2 Plastics,
Inc.


680
Second Street, Suite 200


San
Francisco, CA 94107


Attn:
Rodney S. Rougelot








Item
11.                                Executive
Compensation





Name
      and Principal Position
            Year
            Salary
            Bonus
            Stock
      Awards
            Option
      Awards
            Non-Equity
      Incentive Plan Compensation
            Change
      in Pension Value and Nonqualified Deferred Compensation
      Earnings
            All
      Other Compensation
            TotalCEO
              Rodney
      S. Rougelot (1)
            2008
            $330,000
            $0
            $1,382,000
            $0
            $0
            $0
            $0
            $1,712,0002007
            $330,000
            $0
            $1,382,000
            $0
            $0
            $0
            $0
            $1,712,0002006
            $129,198
            $0
            $4,600,000
            $0
            $0
            $0
            $8,700
            $4,737,898CFO
              Ray
      Salomon
              Appointed
      10/08 (2)
            2008
            $6,923
            $0
            $0
            $0
            $0
            $0
            $0
            $6.9232007
            N/A
            N/A
            N/A
            N/A
            N/A
            N/A
            N/A
            N/A2006
            N/A
            N/A
            N/A
            N/A
            N/A
            N/A
            N/A
            N/AFormer
      CTO
              Gary
      De Laurentiis  (3)
            2008
            $295,178
            $0
            $0
            $0
            $0
            $0
            $0
            $295,1782007
            $290,000
            $0
            $160,000
            $0
            $0
            $0
            $0
            $450,0002006
            $291,628
            $0
            $847,000
            $0
            $0
            $0
            $7,500
            $1,146,128Former
      CFO
              Craig
      Hardy (4)
            2008
            $58,321
            $0
            $0
            $0
            $0
            $0
            $0
            $58,3212007
            $78,846
            $0
            $0
            $198,000
            $0
            $0
            $0
            $78,8462006
            N/A
            N/A
            N/A
            N/A
            N/A
            N/A
            N/A
            N/AFormer
      COO
              Mario
      Sandoval (5)
            2008
            $57,692
            $0
            $0
            $0
            $0
            $0
            $0
            $57,6922007
            $290,769
            $0
            $0
            $0
            $0
            $0
            $0
            $290,7692006
            $45,833
            $0
            $0
            $1,600,000
            $0
            $0
            $5,800
            $1,651,633





(1)
            Under
      the terms of Mr. Rougelot’s employment agreement, he received 35,200,000
      shares of Company common stock, of which all shares were fully vested as
      of September 2008.  The total value of the shares based on the
      $0.13 per share grant date quoted trading price of the Company’s common
      stock was approximately $4.6 million.  In connection with this
      agreement, the Company recorded compensation expense in 2007 of
      approximately $1.4 million for fully-vested shares and for a portion of
      the unvested shares amortized on a straight-line basis over the vesting
      periods.  In addition, pursuant to terms of the executive’s
      employment agreement, the executive received an additional 8,800,000
      fully-vested shares in connection with the certain agreement specified
      capital raising events, and as a result of the occurrence of such event,
      the Company recorded additional compensation expense of approximately $1.1
      million based on the $0.125 per share closing quoted trading price on the
      date of the event.  A total of 44,000,000 million shares of
      Company common stock were issued to the executive in 2006, a portion of
      which is subject to return in accordance with vesting provisions. In
      2007, 11,000,000 of these shares vested. This information is also found in
      the Outstanding Equity Awards at Fiscal Year-End table and the Option
      Exercises and Stock Vested table below. During the year, Mr. Rougelot
      voluntarily deferred payment of $86,317 to reduce cash
      requirements.  Mr. Rougelot received a Senior Convertible note
      for $50,000 and is owed an additional $36,317 for this
      deferral.





(2)
            Pursuant
      to the terms of Mr. Salomon’s employment, Mr. Salomon shall receive an
      annual salary of $180,000 and shall be granted a common stock purchase
      warrant to acquire up to 20,000,000 shares of common stock of the Company
      with an exercise price of $0.015 per share.  This warrant shall
      vest over four years as follows: 25% after the twelfth and 1/48 for each
      month thereafter.  This information is also found in the
      Outstanding Equity Awards at Fiscal Year-End table and the Option
      Exercises and Stock Vested table below.   Mr. Salomon began
      employment on December 15, 2008.





(3)
            Under
      the terms of Mr. DeLaurentiis’ employment agreement, he was to receive
      24,000,000 fully-vested shares or share equivalents (warrants), of which
      he had previously received 17,953,208 of such shares and share
      equivalents, or an additional 6,046,792 shares.   In 2007, in
      connection with this agreement, Mr. DeLaurentiis received an additional
      2,000,000 fully-vested shares of Company common stock, which the Company
      recorded as compensation expense of $160,000, which was, determined on the
      $0.08 per share quoted trading price on the date of the
      award.  Mr. DeLaurentiis resigned in September
      2008.  This information is also found in the Outstanding Equity
      Awards at Fiscal Year-End table and the Option Exercises and Stock Vested
      table below.





(4)
            Craig
      Hardy served as the CFO from August 2007 until his resignation in March
      2008. Pursuant to the terms of Mr. Hardy’s employment agreement,
      he was to receive an annual salary of $250,000 and he was
      to receive equity in the Company of up to 5,000,000 shares of the
      Company’s issued and outstanding stock based on his length of service to
      the Company.  In connection with the employment agreement’s
      equity awards, Mr. Hardy was issued a common stock purchase warrant to
      acquire up to 5,000,000 shares of common stock at $0.108 per
      share/cashless.  This information is also found in the
      Outstanding Equity Awards at Fiscal Year-End table and the Option
      Exercises and Stock Vested table
  below.





(5)
            Mario
      Sandoval served as the COO from October 2006 until his resignation
      effective March 1, 2008.  Under the terms of Mr. Sandoval’s
      employment agreement, he was to receive shares of Company common stock (or
      stock options, at the executive’s election) covering 5% of Common Stock
      Equivalents, as defined in the agreement.  The Effective Date of
      the employment agreement was October 19, 2006, at which date the executive
      received options to purchase 24,000,000 common shares (shares were not
      elected) of Company common stock, of which 12,000,000 (50%) warrant were
      fully-vested, and of which 6,000,000 warrants vest in October 2007 and the
      remaining 6,000,000 were to vest pro-rata from November 2007 to October
      2008. The warrants were exercisable at $0.0975 per share for ten years. In
      connection with this agreement, the Company recorded compensation expense
      of approximately $1.6 million based on the fair value as determined
      utilizing the Black-Scholes valuation model as of the Effective Date for
      fully-vested shares, and $155,000 for a portion of the unvested shares
      amortized on a straight-line basis over the vesting
      periods.  This information is also found in the Outstanding
      Equity Awards at Fiscal Year-End table and the Option Exercises and Stock
      Vested table below.  In connection with Mr. Sandoval’s
      departure, he agreed to return his previously issued common stock purchase
      warrant in exchange for 5,000,000 shares of common stock, par value $0.001
      per share, with a per share price at $0.07 per share which were filed on
      Form S-8 under the Securities Act of 1933 with the
  SEC.








GRANTS OF
PLAN BASED AWARDS.





No grants
of plan based awards were granted during the 2008 fiscal year.




DESCRIPTION
OF ADDITIONAL MATERIAL FACTORS





None.





OUTSTANDING EQUITY AWARDS AT
FISCAL YEAR-END





Name
            Option
      Awards
            Stock
      AwardsNumber
      of Securities Underlying Unexercised Options
            Number
      of Securities Underlying Unexercised Options
            Equity
      Incentive Plan Awards: Number of Securities Underlying Unearned
      Options
            Option
      Exercise Price
            Option
      Expiration Date
            Number
      of Shares or Units of Stock That Have Not Vested
            Market
      Value of Shares or Units of Stock That Have Not Vested
            Equity
      Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights
      That Have Not Vested
            Equity
      Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or
      Other Rights That Have Not VestedExercisable
            UnexercisableCEO
              Rodney
      S. Rougelot (1)
            0
            0
            0
            $0
            N/A
            0
            $0
            0
            $0CFO
      Ray Salomon (2)
            0
            20,000,000
            20,000,000
            $0.015
            N/A
            0
            $0
            0
            $0Former
      CTO
              Gary
      De Laurentiis (3)
            0
            0
            0
            $0
            N/A
            0
            $0
            0
            $0Former
      COO
              Mario
      Sandoval (4)
            0
            0
            0
            $0
            N/A
            0
            $0
            0
            $0Former
      CFO
              Craig
      Hardy (5)
            0
            0
            0
            $0
            N/A
            0
            $0
            0
            $0




(1)
            Under
      the terms of Mr. Rougelot’s employment agreement, he received 35,200,000
      shares of Company common stock, of which all were vested as of September
      2008.  The total value of the shares based on the $0.13 per
      share grant date quoted trading price of the Company’s common stock was
      approximately $4.6 million.  In connection with this agreement,
      the Company recorded compensation expense in 2007 of approximately
      $1.4million for fully-vested shares and for a portion of the unvested
      shares amortized on a straight-line basis over the vesting
      periods.  In addition, pursuant to terms of the executive’s
      employment agreement, the executive received an additional 8,800,000
      fully-vested shares in connection with the certain agreement specified
      capital raising events, and as a result of the occurrence of such event,
      the Company recorded additional compensation expense of approximately $1.1
      million based on the $0.125 per share closing quoted trading price on the
      date of the event.  A total of 44,000,000 million shares of
      Company common stock were issued to the executive in 2006, a portion of
      which is subject to return in accordance with vesting
      provisions. This information is also found in the Summary
      Compensation table above and the Option Exercises and Stock Vested table
      below.




(2)
            Pursuant
      to the terms of Mr. Salomon's employment, Mr. Salomon shall be granted a
      common stock purchase warrant to acquire up to twenty million (20,000,000)
      shares of common stock of the Company with an exercise price of $0.015 per
      share.  This warrant shall vest over four years as follows: 25% after
      the twelfth and 1/48 for each month thereafter.  This information is
      also found in the Summary Compensation table above and the Option
      Exercises and Stock Vested table below.(3)
            Under
      the terms of Mr. De Laurentiis’ employment agreement, he was to receive
      24,000,000 fully-vested shares or share equivalents (warrants), of which
      he had previously received 17,953,208 of such shares and share
      equivalents, or an additional 6,046,792 shares.  In connection
      with this agreement, inasmuch as the shares were fully vested, the Company
      recorded compensation expense and an increase in additional paid-in
      capital of $847,000, which was determined on the $0.14 per share quoted
      trading price on the date of the employment agreement.  This
      information is also found in the Summary Compensation table above and the
      Option Exercises and Stock Vested table below.(4)
            Mario
      Sandoval served as the COO from October 2006 until his resignation
      effective March 1, 2008.  Under the terms of Mr. Sandoval’s
      employment agreement, he is to receive shares of Company common stock (or
      stock options, at the executive’s election) covering 5% of Common Stock
      Equivalents, as defined in the agreement.  The Effective Date of
      the employment agreement is October 19, 2006, at which date the executive
      is to receive options to purchase 24,000,000 common shares (shares were
      not elected) of Company common stock, of which 12,000,000 (50%) warrant
      are fully-vested, and of which 6,000,000 warrants vest in October 2007 and
      the remaining 6,000,000 vest pro-rata from November 2007 to October 2008.
      The warrants are exercisable at $0.0975 per share for ten years. In
      connection with this agreement, the Company recorded compensation expense
      of approximately $1.6 million based on the fair value as determined
      utilizing the Black-Scholes valuation model as of the Effective Date for
      fully-vested shares, and $155,000 for a portion of the unvested shares
      amortized on a straight-line basis over the vesting periods.  In
      connection with Mr. Sandoval’s departure, he agreed to return his
      previously issued common stock purchase warrant in exchange for 5,000,000
      shares of common stock, par value $0.001 per share, with a per share price
      at $0.07 per share which were filed on Form S-8 under the Securities Act
      of 1933 with the SEC.  This information is also found in the
      Summary Compensation table above and the Option Exercises and Stock Vested
      table below.  Effective March 1, 2008, Mr. Sandoval
      resigned.(5)
            Craig
      Hardy served as the CFO from August 2007 until his resignation in March
      2008. Pursuant to the terms of Mr. Hardy’s employment agreement,
      he was to receive an annual salary of $250,000 and he was
      to receive equity in the Company of up to 5,000,000 shares of the
      Company’s issued and outstanding stock based on his length of service to
      the Company.  In connection with the employment agreement’s
      equity awards, Mr. Hardy was issued a common stock purchase warrant to
      acquire up to 5,000,000 shares of common stock at $0.108 per
      share/cashless. This information is also found in the Summary
      Compensation table above and the Option Exercises and Stock Vested table
      below.





OPTION
EXERCISES AND STOCK VESTED TABLE FOR 2008





Name
            Option
      Awards
            Stock
      AwardsNumber
      of Shares Acquired on Exercise
            Value
      Realized on Exercise
            Number
      of Shares Acquired on Vesting
            Value
      Realized on VestingCEO
              Rodney
      S. Rougelot (1)
            0
            $0
            11,000,000
            $1,382,0000CFO
              Ray
      Salomon (2)
            0
            $0
            0
            $0EVP
              Fred
      Janz (3)
            0
            $0
            0
            $0Former
      CTO
              Gary
      De Laurentiis (4)
            0
            $0
            0
            0Former
      COO
              Mario
      Sandoval (5)
            0
            $0
            0
            $0Former
      CFO
              Craig
      Hardy (6)
            0
            $0
            0
            $0





(1)
            Under
      the terms of Mr. Rougelot’s employment agreement, he received 35,200,000
      shares of Company common stock, of which all shares were fully vested as
      of September 2008.  The total value of the shares based on the
      $0.13 per share grant date quoted trading price of the Company’s common
      stock was approximately $4.6 million.  In connection with this
      agreement, the Company recorded compensation expense in 2007 of
      approximately $1.4 million for fully-vested shares and for a portion of
      the unvested shares amortized on a straight-line basis over the vesting
      periods.  In addition, pursuant to terms of the executive’s
      employment agreement, the executive received an additional 8,800,000
      fully-vested shares in connection with the certain agreement specified
      capital raising events, and as a result of the occurrence of such event,
      the Company recorded additional compensation expense of approximately $1.1
      million based on the $0.125 per share closing quoted trading price on the
      date of the event.  A total of 44,000,000 million shares of
      Company common stock were issued to the executive in 2006. In 2007,
      11,000,000 of these shares vested. This information is also found in the
      Summary Compensation table and Outstanding Equity Awards at Fiscal
      Year-End table above.




(2)
            Pursuant
      to the terms of Mr. Salomon’s employment, Mr. Salomon shall be granted a
      common stock purchase warrant to acquire up to twenty million (20,000,000)
      shares of common stock of the Company with an exercise price of $0.015 per
      share.  This warrant shall vest over four years as follows: 25%
      after the twelfth month and 1/48 for each month
      thereafter.  This information is also found in the Summary
      Compensation table and Outstanding Equity Awards at Fiscal Year-End table
      above.




(3)
            Pursuant
      to the terms of Mr. Janz’s employment, Mr. Janz shall be granted a common
      stock purchase warrant to acquire up to twenty million (20,000,000) shares
      of common stock of the Company with an exercise price of $0.015 per
      share.  This warrant shall vest over four years as follows: 25%
      after the twelfth month and 1/48 for each month
      thereafter.  This information is also found in the Summary
      Compensation table and Outstanding Equity Awards at Fiscal Year-End table
      above







(4)
            Under
      the terms of Mr. De Laurentiis’ employment agreement, he was to receive
      24,000,000 fully-vested shares or share equivalents (warrants), of which
      he had previously received 17,953,208 of such shares and share
      equivalents, or an additional 6,046,792 shares.  In 2006, in
      connection with this agreement, inasmuch as the shares were fully vested,
      the Company recorded compensation expense and an increase in additional
      paid-in capital of $847,000, which was determined on the $0.14 per share
      quoted trading price on the date of the employment agreement.  In
      2007, in connection with this agreement, Mr. DeLaurentiis received an
      additional 2,000,000 fully-vested shares of Company common stock, which
      the Company recorded as compensation expense of $160,000, which was,
      determined on the $0.08 per share quoted trading price on the date of the
      award. This information is also found in the Summary Compensation table
      and the Outstanding Equity Awards at Fiscal Year-End table
      above.





(5)
            Mario
      Sandoval served as the COO from October 2006 until his resignation
      effective March 1, 2008. Under the terms of Mr. Sandoval’s employment
      agreement, he was to receive options to purchase 24,000,000 common shares
      of Company common stock, of which 12,000,000 were fully-vested, and
      6,000,000 warrants vest in October 2007 and the remaining 6,000,000 vested
      pro-rata November 2007 to October 2008. The warrants were exercisable at
      $0.0975 per share for ten years.  In connection with Mr.
      Sandoval’s departure, he agreed to return his previously issued common
      stock purchase warrant in exchange for 5,000,000 shares of common stock,
      par value $0.001 per share, with a per share price at $0.07 per share
      which were filed on Form S-8 under the Securities Act of 1933 with the
      SEC.  This information is also found in the Summary Compensation
      table and the Outstanding Equity Awards at Fiscal Year-End table
      above.





(6)
            Craig
      Hardy served as the CFO from August 2007 until his resignation in March
      2008. Pursuant to the terms of Mr. Hardy’s employment agreement,
      he was to receive an annual salary of $250,000 and he was
      to receive equity in the Company of up to 5,000,000 shares of the
      Company’s issued and outstanding stock based on his length of service to
      the Company.  In connection with the employment agreement’s
      equity awards, Mr. Hardy was issued a common stock purchase warrant to
      acquire up to 5,000,000 shares of common stock at $0.108 per
      share/cashless. This information is also found in the Summary
      Compensation table and the Outstanding Equity Awards at Fiscal Year-End
      table above.




PENSION
BENEFITS TABLE





The
Company did not offer a pension plan during fiscal year 2008.




NONQUALIFIED
DEFERRED COMPENSATION TABLE





The
Company did not offer any non-qualified deferred compensation plans during
fiscal year 2008.




DIRECTOR
COMPENSATION DISCLOSURE


The
independent directors received warrants for 1,750,000 shares during the second
quarter.  A charge of $77,041 was recorded for the fair value of these
warrants.





COMPENSATION
COMMITTEE


Compensation
for Executive Officers is considered and set by the compensation committee under
its charter.  The committee is composed of Mr. Hutton, Mr. Moragne,
and Mr. Whittaker, all of whom meet the standard of independence described below
in Item 13.  Compensation for executive officers is reviewed
annually.





AUDIT
COMMITTEE


The Audit
Committee is composed of Mr. Buzby and Mr. Moragne, both of whom meet the
independence standard described below.  Mr. Buzby has been designated
the Audit Committee’s financial expert.  A copy of the Audit Committee
charter is available upon request. The Audit Committee selects the Company’s
independent registered public accounting firm.  ECO2 Plastics’
management is responsible for the Company’s internal controls and the financial
reporting process. The independent registered public accounting firm, Salberg
& Co. P. A. is responsible for performing an independent audit of the
Company’s financial statements and issuing an opinion on the conformity of those
audited financial statements with United States generally accepted accounting
principles and on the effectiveness of the Company’s internal control over
financial reporting, and management’s assessment of the internal control over
financial reporting. The Audit Committee monitors the Company’s financial
reporting process and reports to the Board of Directors on its
findings.





Item
12.                                Security
Ownership of Certain Beneficial Owners and Management





The
following table sets forth certain information regarding the beneficial
ownership of our common stock as of January 5, 2009:





Name
      and Address of Beneficial Holder:
            Title
      of Class:
            Amount
      and Nature of Beneficial Ownership:
            Percent
      of Class:Rodney
      S. Rougelot (1)
              680
      Second Street, Suite 200
              San
      Francisco, CA 94107
            Common,
      $.001 par value
            54,490,698
            7%Series
      A Preferred
            23,678,040
            29%Series
      C Preferred
            10,098,168
            <5%William
      Whittaker (2)
              8070
      La Jolla Shores Drive, #508
              La
      Jolla, CA 92037
            Common,
      $.001 par value
            113,980,775
            14%Series
      A Preferred
            39,818,972
            48%Series
      B-1 Preferred
            15,000,000
            11%Series
      C Preferred
            6,666,667
            <5%David
      M. Otto (3)
              601
      Union Street, Ste. 4500
              Seattle,
      WA 98101
            Common,
      $.001 par value
            9,064,419
            <5%Series
      A Preferred
            7,216,071
            9%Series
      B-1 Preferred
            12,500,000
            9%Series
      C Preferred
            6,666,666
            <5%G.
      Thompson Hutton (4)
              c/o
      White Mountains Insurance Group, Ltd.
              80
      South Main Street
              Hanover,
      NH  03755
            Common,
      $.001 par value
            15,918,073
            <5%Series
      B-1 Preferred
            12,613,013
            15%Series
      C Preferred
            10,021,918
            <5%David
      Buzby (5)
              680
      Second Street, Suite 200
              San
      Francisco, CA 94107
            Common,
      $.001 par value
            15,918,072
            <5%Series
      B-1 Preferred
            20,000,000
            15%Series
      C Preferred
            9,990,000
            <5%John
      Moragne (6)
              Trident
      Capital Management-VI, L.L.C.
              c/o
      Trident Capital, Inc.
              505
      Hamilton Ave., Ste. 200
              Palo
      Alto, CA 94301
            Common,
      $.001 par value
            115,108,859
            14%Series
      B-1 Preferred
            75,160,274
            56%Series
      C Preferred
            230,217,718
            62%Alex
      Millar,
              Peninsula
      Packaging, LLC (8)
              c/o
      Stradley Ronon Stevens & Young, LLP
              2600
      One Commerce Square
              Philadelphia,
      PA 19103
            Common,
      $.001 par value
            50,100,822
            6%Series
      C Preferred
            100,201,644
            27%Roy
      Herberger (9)
              680
      Second Street, Suite 200
              San
      Francisco, CA 94107
            Common,
      $.001 par value
            550,000
            <5%Lawrence
      A. Krause (10)
              1001
      Bayhill Drive, Suite 170
              San
      Bruno, CA 94066
            Common,
      $.001 par value
            15,125,000
            <5%Ronald
      Domingue (11)
              680
      Second Street, Suite 200
              San
      Francisco, CA 94107
            Common,
      $.001 par value
            500,000
            <5%Series
      A Preferred
            12,313,648
            15%Craig
      Hardy
              680
      Second Street, Suite 200
              San
      Francisco, CA 94107
            Common,
      $.001 par value
            750,000
            <5%Gary
      De Laurentiis
              680
      Second Street, Suite 200
              San
      Francisco, CA 94107
            Common,
      $.001 par value
            45,455
            <5%Mario
      Sandoval (7)
              680
      Second Street, Suite 200
              San
      Francisco, CA 94107
            
            0
            0%Total
      Held by Officers, Directors and Beneficial Owners Of Each Class
      (12):
            Common,
      $.001 par value
            391,552,173Series
      A Preferred
            83,026,731Series
      B-1 Preferred
            135,273,287Series
      C Preferred
            373,862,781Total
      Held by Officers and Directors of Each Class (12):
            Common,
      $.001 par value
            315,416,477Series
      A Preferred
            63,497,012Series
      B-1 Preferred
            122,773,287Series
      C Preferred
            266,994,471





(1)
            Of
      the amount of common stock beneficially held, Mr. Rougelot owns a common
      stock purchase warrant to acquire up to 3,385,800 shares of common stock
      at $.015 per share/cashless.  He also has a warrant to acquire
      up to 1,666,667 shares of common stock at $.015 per
      share/cashless.  Both warrants expire on April 15,
      2015.  Mr. Rougelot also owns convertible notes totaling
      $151,472.53 that can convert into 10,098,168 shares of Series C preferred
      stock at $0.015 per share. The Series C share total represents the
      converted note principle only.





(2)
            Of
      the amount of common stock beneficially held, (i) Whittaker Capital
      Partners, LLC (“Whittaker Capital”), of which Mr. Whittaker is the
      manager, owns 103,910,937 shares of common stock, (ii) the William and
      Michele Whittaker Trust UTD 6/25/03 (the “Whittaker Trust”) owns
      10,069,838 shares of common stock, (iii) the Whittaker Trust owns common
      stock purchase warrants to acquire up to 250,000 shares of common stock at
      $0.22 per share/cashless, (iv) the Whittaker Trust owns a warrant to
      acquire up to 250,000 shares at  $0.07 per share/cashless, and
      (v) the Whittaker Trust owns a warrant to acquire up to 3,333,333 shares
      of common stock at $0.15 per share/cashless.  All warrants
      expire on April 15, 2015.  The total amount of Series A
      preferred is held by the Whittaker Trust.  Of the amount of
      Series B-1 preferred held, (i) Whittaker Capital owns 10,000,000 shares,
      (ii) Whittaker/Valley River Partners, LLC, of which Mr. Whittaker is the
      manager, owns 5,000,000 shares and (iii) Whittaker/Northwest Partners,
      LLC, of which Mr. Whittaker is the manager, owns 5,000,000
      shares.  Mr. Whittaker owns a convertible note totaling $100,000
      that can convert into 6,666,667 shares of Series C preferred at $0.015 per
      share.  The Series C share total represents the converted note
      principle only.





(3)
            Of
      the amount of common stock beneficially held, (i) 3,231,085 shares of
      common stock are held by the Otto Law Group, PLLC, of which Mr. Otto is
      the principal, (ii) Saratoga Capital Partners, LLC (“Saratoga”), of which
      Mr. Otto is a member, owns a common stock purchase warrant to acquire up
      to 1,666,667 shares of common stock at $0.015 per share/cashless and (iii)
      Cambridge Partners, LLC, of which Mr. Otto is a member, owns a warrant to
      acquire up to 1,666,667 shares of common stock at $0.015 per
      share/cashless.  Both warrants will expire on April 15, 2015.
      All shares of Series A preferred and Series B preferred held are held by
      Saratoga. Additionally, Saratoga owns a note totaling $50,000 that can
      convert into 3,333,333 shares of Series C preferred stock at $0.015 per
      share.  Cambridge owns a note totaling $50,000 that can convert
      into 3,333,333 shares of Series C preferred stock at $0.015 per
      share.  The Series C share total represents the converted note
      principle only.





(4)
            Of
      the amount of common stock beneficially held, (i) Mr. Hutton owns a common
      stock purchase warrant to acquire up to 10,918,072  shares of
      common stock at $0.02 per share/cashless, (ii) the Hutton Living Trust DTD
      12/10/96, of which Mr. Hutton is the trustee (the “Hutton Trust”), owns a
      warrant to acquire up to 1,666,667 shares of common stock at $0.015 per
      share/cashless and (iii) the Hutton Trust  owns a warrant to
      acquire up to 1,677,626 shares of common stock at $0.015 per
      share/cashless. All warrants expire on April 15, 2015.  Of the
      Series B-1 preferred stock held, the Hutton Trust holds all
      shares.  Hutton Trust owns notes totaling $150,328.77 that can
      convert into 10,021,918 shares of Series C preferred stock at $0.015 per
      share. The Series C share total represents the converted note principle
      only.





(5)
            Of
      the amount of common stock beneficially held, (i) Mr. Buzby owns a common
      stock purchase warrant to acquire up to 10,918,072 shares of common stock
      at $0.02 per share/cashless and (ii) the Buzby-Vasan 1997 Trust, of which
      Mr. Buzby is a trustee (the “Buzby Trust”), owns a warrant to acquire up
      to 5,000,000 shares of common stock at $0.015 per
      share/cashless.  Both warrants expire on April 15, 2015. Of the
      shares of Series B-1 preferred held, the Buzby Trust owns all 20,000,000
      shares. The Buzby Trust owns a note totaling $149,850 that can convert
      into 9,990,000 shares of Series C preferred stock at $0.015 per share. The
      Series C share total represents the converted note principle
      only.





(6)
            Trident
      Capital Management-VI, L.L.C. is the sole general partner of Trident
      Capital Fund-VI, L.P. ("Trident Capital") and the sole managing member of
      Trident Capital Fund - Principals Fund VI, LP (“Trident
      Principals”).  Mr. Moragne is the Managing Member of Trident
      Capital.  Of the amount of common stock beneficially held, (i)
      Trident Capital, owns common stock purchase warrants to acquire up to (a)
      32,088,822 shares of common stock at $0.015 per share/cashless, (b)
      32,088,821 shares at $0.015 per share/cashless and (c) 46,633,583 shares
      at $0.015 per share/cashless and (ii) Trident Principals owns warrants to
      acquire up to (a) 1,244,512 shares at $0.015 per share/cashless, (b)
      1,244,513 shares at $0.015 per share/cashless and (c) 1,808,608 shares at
      $0.015 per share/cashless.  All warrants expire on April 15,
      2015. Of the amount of Series B-1 preferred stock beneficially held,
      Trident Capital owns 72,354,136 shares and Trident Principals owns
      2,806,138 shares.  Trident Capital owns notes totaling
      $3,324,336.76 that can convert into 221,622,451 shares of Series C
      preferred stock at $0.015 per share.  Trident Principals owns
      notes totaling $128,929.53 that can convert into 8,595,267 shares of
      Series C preferred stock at $0.015 per share. The Series C share total
      represents the converted note principle
only.





(7)
            No
      shares are beneficially held.





(8)
            Mr.
      Millar is a member of the founding team of Peninsula Packaging LLC and has
      been Managing Director since July 2002. Of the amount of common stock
      beneficially held, Peninsula Packaging, LLC owns a common stock purchase
      warrant to acquire up to 50,100,822 shares of common stock at $0.015 per
      share/cashless.  This warrant expires on April 15, 2015.
      Peninsula owns a note totaling $1,503,024.66 that can convert into
      100,201,644 shares of Series C preferred stock at $0.015 per share. The
      Series C share total represents the converted note principle
      only.





(9)
            Of
      the amount of common stock beneficially held, Mr. Herberger owns a owns a
      common stock purchase warrant to acquire up to 250,000 shares of common
      stock at $0.07 per share/cashless.  This warrant expires on
      April 15, 2015.





(10)
            Of
      the amount of common stock beneficially held, KW Securities Corp., of
      which Mr. Krause is the manager, owns (i) a common stock purchase warrant
      to acquire up to 14,625,000 shares of common stock at $0.06 per
      share/cashless, (ii) a warrant to acquire up to 250,000 shares of common
      stock at $0.22 per share/cashless and (iii) a warrant to acquire up to
      250,000 shares of common stock at $0.07 per share/cashless.  All
      warrants expire on April 15, 2015.





(11)
            Of
      the amount of common stock beneficially held, The Domingue Family Trust,
      of which Mr. Domingue is a trustee (the “Domingue Trust”), owns a common
      stock purchase warrant to acquire (i) up to 250,000 shares of common stock
      at $0.22 per share/cashless and (ii) a warrant to acquire up to 250,000
      shares of common stock at $0.07 per share/cashless. Both warrants expire
      on 4/15/15. Of the amount of Series A preferred stock held, the Domingue
      Trust is the holder.





(12)
            In
      accordance with SEC rules, percent of class as of January 5, 2009 is
      calculated for each person and group by dividing the number of shares
      beneficially owned by the sum of the total shares outstanding plus the
      number of shares subject to securities exercisable by that person or group
      within 60 days. As of January 5, 2009, there were 831,505,769
      shares of common stock outstanding, 83,026,731 shares of Series A
      preferred stock outstanding, 135,273,287 shares of Series B-1 preferred
      stock outstanding and 373,862,781 shares of Series C preferred stock
      outstanding.





Item
13.                                Certain
Relationships and Related Transactions





During
2008, holders of outstanding Director Notes and Short-term notes, which had an
outstanding principal amount of approximately $2.9 million and $4.6 million and
related accrued interest payable of $318,000 and $206,000, respectively,
exchanged all such notes and accrued interest for 152,843,413 shares of the
Company’s Series A Convertible Preferred Stock and 111,240,040 shares of the
Company’s Series B-1 Convertible Preferred Stock.





During
2008, the Company’s Chief Executive Officer loaned the Company $270,000 pursuant
to terms of short-term notes payable bearing interest at 15%, of which $175,000
was repaid.  The remaining $95,000 and related accrued interest of
approximately $6,000 were exchanged for convertible notes payable, which were
subsequently converted into a warrant to purchase 3,385,800 shares of common
stock and a convertible note, which is convertible into shares of the Company’s
Series C Convertible Preferred Stock.





Pursuant
to an agreement for legal services with The Otto Law Group, PLLC (“OLG”), a law
firm, the managing partner of which was until December 2008 one of the Company’s
Directors.  During 2008, the Company incurred fees for OLG legal
services of approximately $327,000.   In March 2008, the Company
issued approximately 12.0 million shares of its common stock in exchange for
satisfaction of accounts payable to the firm of approximately
$567,000.





In 2008,
the Company entered into an agreement with a former officer pursuant to terms of
which, among other things, the officer ceased employment with the Company and
the employment agreement entered into by the Company and officer in 2006
terminated.  In connection with this agreement, the Company paid the
former officer approximately $75,000, the officer transferred to the Company
717,949 shares of Company common stock, and the Company issued 2.5 million
shares of its common stock and paid $50,000 cash to a third party.





Director
Independence


The
following standards are considered when determining whether a Board member is
independent:




An
"Independent Director" is a director who 1) is not an executive officer of the
company or 2) is not an employee of the company or 3) does not have any
other  relationship which, in the opinion of the board of directors,
would interfere with the exercise of independent judgement in carrying out the
responsibilities of a director. Persons in the following categories shall not be
considered independent:




(A)a director who is, or at
any time during the past three years has been, employed by the
company;




(B)a director who accepted or
who has a Family Member who accepted any cash compensation from the company in
excess of $120,000 during any period of twelve consecutive months within the
three years preceding the determination of independence, other than the
following:




(i)compensation for service
on the board or board committee(s);




(ii)compensation paid to a
Family Member who is an employee (other than an executive officer) of the
company; or




(iii)benefits under a
tax-qualified retirement plan, or non-discretionary compensation,




Audit
committee members must meet the requirements above along with the more stringent
requirements described below:




(C)a director who is a Family
Member of an individual who is, or at any time during the past three years was,
employed by the company as an executive officer;




(D)a director who is, or has
a Family Member who is, a partner in, or a controlling shareholder, or an
executive officer of, any organization to which the company made, or from which
the company received, payments for property or services in the current or any of
the past three fiscal years that exceed 5% of the recipient's consolidated gross
revenues for that year, or $200,000, whichever is more, other than the
following:




(i)payments arising solely
from investments in the company's securities; or




(ii)payments under
non-discretionary charitable contribution matching programs.




(E)a director of the issuer
who is, or has a Family Member who is, employed as an executive officer of
another entity where at any time during the past three years any of the
executive officers of the issuer serve on the compensation committee of such
other entity; or




(F)a director who is, or has
a Family Member who is, a current partner of the company's outside auditor, or
was a partner or employee of the company's outside auditor who worked on the
company's audit at any time during any of the past three years.




(G)in the case of an
investment company, in lieu of paragraphs (A)-(F), a director who is an
"interested person" of the company as defined in Section 2(a)(19) of the
Investment Company Act of 1940, other than in his or her capacity as a member of
the board of directors or any board committee.




·
            Directors
      with immediate family members in the preceding categories are subject to
      the same three-year restriction.





Based on
these standards, Mr. Buzby, Mr. Herberger, Mr. Hutton, Mr. Moragne, and Mr.
Whittaker are independent.




Item
14.                                Principal
Accountant Fees and Services.





Salberg
& Company, P.A. served as our independent registered public accounting
firm for the fiscal years 2008 and 2007.




During
the fiscal years ended December 31, 2008 and 2007, fees in connection with
services provided by Salberg & Company, P.A. are as set forth
below:





Fee
      Category
            2008
            2007Audit
      Fees
            $118,000
            $125,000Audit
      Related Fees
            -
            $4,800Tax
      Fees
            -
            -All
      Other Fees
            -
            -Total
            $118,000
            $129,800





Audit
fees consisted of fees for the audit of the Company's annual financial
statements and review of quarterly financial statements. Audit related fees
consist of services normally provided in connection with statutory and
regulatory filings or engagements, consents and assistance with and review of
Company documents filed with the SEC.




Tax fees
consist primarily of fees for tax compliance, tax advice and tax planning
services.  There were no such fees paid to Salberg & Company, P.
A. during 2008.




We made
no payments of other fees to Salberg & Company, P.A. during
2008.





Policy
for Pre-Approval of Audit and Non-Audit Services




The Audit
Committee's policy is to pre-approve all audit, audit-related and non-audit
services to be provided by the independent registered public accounting firm and
adopt and implement policies for such pre-approval. The independent registered
public accounting firm shall not be engaged to perform specific non-audit
services proscribed by law or regulation. The Committee may delegate
pre-approval authority to a member of the Committee. The decisions of any
Committee member to whom pre-approval authority is delegated must be presented
to the full Audit Committee at its next scheduled meeting.




All
engagements of the independent registered public accounting firm to perform any
audit services and non-audit services have been pre-approved by the Committee in
accordance with the pre-approval policy. The policy has not been waived in any
instance.





Item
15.                                Exhibits
and Financials Statement Schedules.





Please
see the attached Exhibit Index.








SIGNATURES




Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned; thereunto duly authorized, in the City of San Francisco, State
of California, on April 13, 2009.






Registrant




ECO2 PLASTICS,
INC.






/s/
Rodney S. Rougelot


By:
Rodney S. Rougelot


Director,
Chief Executive Officer








/s/
Raymond M. Salomon


By:
Raymond M. Salomon


Chief
Financial Officer









Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of Registrant and in the
capacities indicated on April 13, 2009.






/s/ G. Thompson Hutton


G.
Thompson Hutton


Chairman






/s/ David Buzby


David
Buzby


Director






/s/ William Whittaker


William
Whittaker


Director






/s/Alex Millar


Alex
Millar


Director






/s/John Moragne


John
Moragne


Director